Legislature(2005 - 2006)HOUSE FINANCE 519

02/24/2006 12:30 PM RESOURCES

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12:34:58 PM Start
12:37:54 PM HB488
04:08:14 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
Heard & Held
+ Presentation by the Administration TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be HOUSE BILL  NO. 488, "An Act repealing the  oil production tax                                                               
and gas production tax and providing  for a production tax on the                                                               
net value  of oil and  gas; relating  to the relationship  of the                                                               
production  tax  to  other  taxes;  relating  to  the  dates  tax                                                               
payments  and surcharges  are  due under  AS  43.55; relating  to                                                               
interest  on  overpayments  under   AS  43.55;  relating  to  the                                                               
treatment  of  oil  and  gas   production  tax  in  a  producer's                                                               
settlement with  the royalty owner;  relating to flared  gas, and                                                               
to oil  and gas  used in  the operation of  a lease  or property,                                                               
under AS  43.55; relating to the  prevailing value of oil  or gas                                                               
under AS  43.55; providing  for tax credits  against the  tax due                                                               
under AS 43.55 for certain  expenditures, losses, and surcharges;                                                               
relating to statements or other  information required to be filed                                                               
with or furnished  to the Department of Revenue,  and relating to                                                               
the penalty for failure to  file certain reports, under AS 43.55;                                                               
relating to the  powers of the Department of Revenue,  and to the                                                               
disclosure  of certain  information required  to be  furnished to                                                               
the Department of  Revenue, under AS 43.55;  relating to criminal                                                               
penalties for  violating conditions  governing access to  and use                                                               
of  confidential   information  relating  to  the   oil  and  gas                                                               
production tax;  relating to  the deposit  of money  collected by                                                               
the  Department  of  Revenue  under AS  43.55;  relating  to  the                                                               
calculation of the gross value at  the point of production of oil                                                               
or  gas;  relating to  the  determination  of  the net  value  of                                                               
taxable oil and  gas for purposes of a production  tax on the net                                                               
value  of oil  and gas;  relating  to the  definitions of  'gas,'                                                               
'oil,' and certain  other terms for purposes of  AS 43.55; making                                                               
conforming amendments; and providing for an effective date."                                                                    
12:37:54 PM                                                                                                                   
ROGER MARKS,  Petroleum Economist,  Department of  Revenue (DOR),                                                               
stated that  he would  be explaining the  provisions in  the bill                                                               
that  were crafted  to help  small producers  and new  investors,                                                               
which are  the main  goals of  the legislation.   Referring  to a                                                               
document   entitled  "PPT   [Petroleum  Production   Tax]:  Small                                                               
Producers  New  Investors,"  he explained  that  small  producers                                                               
bring  several  advantages  to  the  state,  including  a  bigger                                                               
appetite for  smaller targets, diversity, and  evidence has shown                                                               
that  small   producers  are  more  likely   to  explore  "risky"                                                               
prospects.  In addition, he  said that new [large] investors will                                                               
bring  benefits, with  the possibility  of developing  the Arctic                                                               
National Wildlife  Refuge (ANWR) and National  Petroleum Reserve-                                                               
Alaska (NPR-A) opening.                                                                                                         
12:39:35 PM                                                                                                                   
MR. MARKS explained that the  three basic mechanisms that support                                                               
these  goals  are selling  losses,  selling  credits, and  a  $73                                                               
million allowance.  He said he  will also go over the affect this                                                               
bill will have on Cook Inlet.                                                                                                   
MR.  MARKS referred  to  page 4  of the  handout,  which gave  an                                                               
overview of the oil & gas producing companies in the area.                                                                      
12:40:14 PM                                                                                                                   
CO-CHAIR RAMRAS stated that he  is very interested in development                                                               
in the  Nenana Basin  and asked  if Cook  Inlet includes  all the                                                               
peripheral areas.                                                                                                               
MR.  MARKS  explained that  the  chart  includes areas  that  are                                                               
currently  producing,   adding  that   currently  there   is  not                                                               
production in the Nenana Flats and  the state hopes [HB 488] will                                                               
encourage development  there.   He pointed out  a mistake  in the                                                               
chart, and said  that it should read:   Chevron/Union Oil Company                                                               
of  California  (Unocal)  7,800  barrels  a  day  and  ExxonMobil                                                               
Corporation 1,100  barrels a day.   He explained that  Cook Inlet                                                               
is more focused on gas production than oil production.                                                                          
MR. MARKS  said page 5  shows a  delineation of companies  in the                                                               
North Slope, which currently produces  close to 1 million barrels                                                               
per day.   Anadarko Petroleum  Corporation is expected  to become                                                               
more important  as they move out  to the western North  Slope and                                                               
the NPR-A.   He added that HB 488 is  designed to make production                                                               
more  attractive to  the Shell  Group.   In addition,  Kerr-McGee                                                               
Corporation  is  developing  the  Nikaitchuq  field  and  Pioneer                                                               
Natural Resources  is developing the  Oooguruk field.   He opined                                                               
that  both the  Nikaitchuq and  Oooguruk fields  will produce  20                                                               
thousand barrels per day at peak  production.  He noted that page                                                               
6  of  the  handout  combines  the North  Slope  and  Cook  Inlet                                                               
projects to create a "Statewide Barrels of Oil Equivalent."                                                                     
12:43:43 PM                                                                                                                   
MR. MARKS turned to the  mechanisms for attracting new investors,                                                               
both large  and small.   Referring to  page 8, he  explained that                                                               
selling losses  means that if a  new company loses $1  million in                                                               
its first  year, the company would  be able to convert  this loss                                                               
to a  credit.  The  credit is set  at the  tax rate, which  is 20                                                               
percent.   Multiplied by the  $1 million, the total  credit would                                                               
be  $200,000  dollars.   This  credit  would  be sellable  at  90                                                               
percent of  the face value, which  is $180,000.  This  allows the                                                               
company to monetize the loss  immediately, instead of carrying it                                                               
forward until revenue is earned.   He added that on a net present                                                               
value basis, this is important for boosting the rate of return.                                                                 
12:45:17 PM                                                                                                                   
CO-CHAIR  SAMUELS commented  that if  the credit  sells for  less                                                               
than the full  value, the state would still be  "on the hook" for                                                               
the 20 percent credit.                                                                                                          
MR. MARKS agreed and said that  [Company A] would sell the credit                                                               
to  [Company B]  for $200,000  and  [Company B]  would then  have                                                               
$20,000 in credit.                                                                                                              
CO-CHAIR  SAMUELS  pointed  out  that [Company  A]  is  losing  a                                                               
percentage on  the sale of  the credit and  asked if it  would be                                                               
better to  have a mechanism  in place for  the state to  give the                                                               
money  directly  to  [Company  B].    He  opined  that  this  may                                                               
encourage [Company A] to spend more.                                                                                            
MR. MARKS asked how Company A would benefit from this.                                                                          
CO-CHAIR  SAMUELS said  Company A  can only  sell 90  percent, so                                                               
will be  receiving an  18 percent credit  instead of  20 percent.                                                               
This  is a  loss of  a loss,  and he  opined that  the state  and                                                               
Company B  do not care.   If Company A  were able to  receive the                                                               
full value of the credit, it may be more likely to spend money.                                                                 
12:47:42 PM                                                                                                                   
CO-CHAIR SAMUELS  asked if there  is any way  to make it  so that                                                               
[Company B is paying the full value].                                                                                           
MR. MARKS  replied that the  credits are only  marketable because                                                               
they are sold for less than they are worth.                                                                                     
REPRESENTATIVE SEATON  gave an example  in which the cost  to the                                                               
state would be the same while  [Company A] would receive the full                                                               
value of $200,000.                                                                                                              
MR. MARKS  said that he needed  to think about this  and that the                                                               
credits are "worthless" if sold at face value.                                                                                  
12:49:03 PM                                                                                                                   
REPRESENTATIVE BERKOWITZ noted  that if a company  earns a credit                                                               
and tries  to market it  in a small  market, it must  be severely                                                               
discounted, which undercuts the utility of having a tax cut.                                                                    
MR.  MARKS  stated  that  in  the  Exploration  Incentive  Credit                                                               
Program (EIC)  credits have been  selling at about 90  percent of                                                               
market  value.     He  commented  that  as  long   as  there  are                                                               
competitors, there is a good  chance to receive a high percentage                                                               
of face value and opined that this is "risk-less, free money."                                                                  
REPRESENTATIVE  BERKOWITZ  remarked  that   the  state  would  be                                                               
creating a  market for  something from  which someone  else would                                                               
profit, which does not necessarily work to benefit the state.                                                                   
MR. MARKS  stated that if Shell  comes into the state  because it                                                               
is able to  monetize its investment sooner, then  all parties are                                                               
better off.                                                                                                                     
12:50:28 PM                                                                                                                   
CO-CHAIR SAMUELS  stated that  his intent  in regard  to previous                                                               
questions was to  help Company A, but agreed that  if there is no                                                               
reason to buy the credit, the market "needs to work."                                                                           
12:50:37 PM                                                                                                                   
REPRESENTATIVE  MCGUIRE noted  that  the goal  is to  incentivize                                                               
development  and exploration  by small  companies, and  asked why                                                               
the legislature does not give a  dollar for dollar tax credit for                                                               
any capital investment made.                                                                                                    
MR. MARKS said that is possible but may cost the state money.                                                                   
REPRESENTATIVE MCGUIRE remarked that it  would cost money, but it                                                               
wouldn't  cost  money  in  terms  of  the  taxes  of  the  larger                                                               
CO-CHAIR SAMUELS reminded the committee  that the current portion                                                               
of  the presentation  was an  overview of  credit sales  and that                                                               
taxes would be discussed at a later time.                                                                                       
12:52:24 PM                                                                                                                   
REPRESENTATIVE  LEDOUX  said  that  the companies  are  going  to                                                               
receive a tax  credit, and [selling credits] would  only occur if                                                               
the company cannot use the tax credit.                                                                                          
MR. MARKS replied yes; this is merely  if there is a loss and the                                                               
company wants to monetize the loss sooner.                                                                                      
12:52:58 PM                                                                                                                   
REPRESENTATIVE LEDOUX  asked if  the companies  can sell  the tax                                                               
loss to any company or if it needs to be a producer.                                                                            
MR. MARKS replied that it is limited to the petroleum industry.                                                                 
12:53:36 PM                                                                                                                   
ROBYNN  WILSON, Director,  Tax Division,  Department of  Revenue,                                                               
agreed that this  is correct, adding that the  losses and credits                                                               
may only be used against the  production tax, and may not be used                                                               
for other taxes, such as the state income tax.                                                                                  
12:53:56 PM                                                                                                                   
REPRESENTATIVE LEDOUX  asked why, if  the state is  attempting to                                                               
maximize  tax losses  and encourage  investment,  the losses  and                                                               
credits would not be applicable to anyone.                                                                                      
MR. MARKS explained that this is to protect the state's revenue.                                                                
REPRESENTATIVE LEDOUX asked why this  is not an option and opined                                                               
that if the state is going to  "take the hit," it does not matter                                                               
whether it  is in the proposed  profit-based petroleum production                                                               
tax (PPT) or the state income tax.                                                                                              
MR.  MARKS  replied  that  the  losses  would  only  be  used  in                                                               
situations when  the companies were  losing money  and reiterated                                                               
that applying  the losses to the  PPT is intended to  protect the                                                               
state's revenue base in periods of very low prices.                                                                             
12:56:48 PM                                                                                                                   
CO-CHAIR  RAMRAS  asked  if  [the state]  is  selling  losses  or                                                               
selling investment.                                                                                                             
MR. MARKS replied these are  losses and explained the process for                                                               
selling losses.                                                                                                                 
CO-CHAIR RAMRAS said  one of the scenarios he  is concerned about                                                               
is someone  takes 3-5 years  to develop  oil prospects.   And, in                                                               
the meantime,  the price of  oil decline.   He said he  just hear                                                               
that the  price of oil  is headed back  to $30 per  barrel, which                                                               
would mean  some dire things for  the state budget, and  it means                                                               
the state  would be  more reliant  than ever  on the  state's tax                                                               
"skins" like the PPT.  He  said companies will be allowed to sell                                                               
the  credits,  and  he  asked if  the  administration  done  "any                                                               
modeling to determine  how much of a credit can  be used by those                                                               
companies  that   are  presently   enjoying  profits,   that  are                                                               
interested in sheltering profits that  they are deriving today by                                                               
companies small, large or otherwise  that are investing, with the                                                               
horizon the  that's going to  generate revenue  and profitability                                                               
over the next  three, five, seven years, but  they are interested                                                               
in monetizing  their credits  today, and  they are  selling those                                                               
credits  to  companies  that  can use  those  credits  today  and                                                               
shelter those credits."                                                                                                         
CO-CHAIR RAMRAS continued:                                                                                                      
     Which  goes back  to my  theme, which  is: I'm  worried                                                                    
     about  accountants being  able  to drive  a Mack  truck                                                                    
     through  [HB  488], and  that's  going  to be  where  I                                                                    
     continue  to come  down here,  is  this paradigm  shift                                                                    
     toward  the  power  of  accountants  and  the  big  oil                                                                    
     companies  taking advantage  of  the tax  code that  we                                                                    
     create.  So,  I'm uncomfortable with the  fact that you                                                                    
     put [$1  million] up here,  which I'm sure  you thought                                                                    
     was a good thing to  do, but nobody invested $1 million                                                                    
     up on the slope.   So I want to make  sure we don't get                                                                    
     taken for a ride there,  that it should be $10 million,                                                                    
     $50 million or  $100 million, so that  we're looking at                                                                    
     credits  that are  $20 million  credit, cause  nobody's                                                                    
     going to  ... have  a $200,000 credit  to sell.   These                                                                    
     are going to be large  increment credits that are going                                                                    
     to  get applied  to the  majors,  who are  going to  be                                                                    
     buying at  discount, as Chair  Samuels indicated.   And                                                                    
     so, that's  the concern that  I have, is  what exposure                                                                    
     does the state  have if the price of oil  goes from $60                                                                    
     to $30, $35, the producers  that are still making a lot                                                                    
     of  money and  paying a  lot  of taxes  are now  buying                                                                    
     every available credit from  every small, medium, large                                                                    
     guy that's coming  in here, and what  kind of financial                                                                    
     or fiscal  exposure does that  create for the  state of                                                                    
MR. MARKS said  there is a provision in the  bill that limits the                                                               
amount of tax liability credits to 20 percent of the tax bill.                                                                  
REPRESENTATIVE CRAWFORD remarked that one  of the concerns he has                                                               
heard is that  the big producers will be the  only market to sell                                                               
the credits, which  may force down the price of  the credits.  In                                                               
this scenario, the producer would  get the benefit of the credit,                                                               
not the state.  He asked  about the state being the willing buyer                                                               
at  90  or  95 percent,  to  keep  the  price  up so  that  major                                                               
producers wouldn't get too much of a windfall.                                                                                  
1:02:37 PM                                                                                                                    
MR. MARKS said  he would have to think about  this and added that                                                               
as  the bill  evolves there  may  be some  interesting things  to                                                               
think about  regarding the  face value of  the credit  versus the                                                               
actual credit.                                                                                                                  
CO-CHAIR  SAMUELS  asked  Representative   Crawford  if,  in  his                                                               
scenario, the state would have a floor for selling the credit.                                                                  
REPRESENTATIVE CRAWFORD  said there  is a  time value  for money,                                                               
and  there would  be a  point where  the state  would benefit  by                                                               
buying the credit.                                                                                                              
REPRESENTATIVE MCGUIRE  said small  companies are going  to reach                                                               
their  losses  early,  so  then  there  is  no  benefit  to  keep                                                               
exploring, if  they can't use that  loss to offset it.   "And so,                                                               
what  you're trying  to do  is allow  a market  to be  created to                                                               
essentially recoup  part of  those extra losses."   She  asked if                                                               
there has  been modeling to  show what  would happen in  terms of                                                               
incentivizing  the  small  companies  "rather  than  open  up  to                                                               
transferability, you  simply confined it  to the  small companies                                                               
but you  ran it  out to  infinity, and  maybe even  increased the                                                               
percentage,  so  that  you  really   wouldn't  be  expanding  the                                                               
universe to  other taxpayers."   She noted  that the oil  and gas                                                               
companies  are 80  percent of  the  state budget,  and the  state                                                               
greatly    values    their    investments,   "but    with    this                                                               
transferability,  you  have this  really  noble  goal of  getting                                                               
small companies  investing Alaskan  and exploring and  making new                                                               
finds  where everybody  benefits,  but when  you're staying  with                                                               
these  tax credits,  it's like  me saying  I'm going  to make  an                                                               
offering of  $1 bills and  you can buy them  for 80 cents."   She                                                               
said  she understands  the 20  percent  threshold, but  companies                                                               
will  buy as  many as  they  can since  there is  no time  limit,                                                               
"they're transferable  into infinity and they're  transferable up                                                               
to 100  percent."  She  said there is no  way of knowing  what it                                                               
will bring to the future of oil and gas revenue to the state.                                                                   
     Because I  don't know how  many of these  companies are                                                                    
     going to  take advantage,  but if it  works the  way we                                                                    
     want, a lot of people  are going to be exploring, there                                                                    
     are going to be a lot of  losses and a lot of these tax                                                                    
     credits floating  around.  So,  not only are  the small                                                                    
     companies  going  to be  taking  advantage  of it,  but                                                                    
     they're selling these credits, and  then you've got the                                                                    
     three majors who are contributing  the large sum to our                                                                    
     tax base,  reducing, with no  limit to  that reduction,                                                                    
     what they're paying to us.   So, ... to the extent that                                                                    
     [Mr. Marks]  can let us  know what thought  process has                                                                    
     gone  into  that, and  whether  or  not you've  thought                                                                    
     about how to incentivize  these small companies, but to                                                                    
     minimize the potential  loss to the state.   I would be                                                                    
     interested to hear.   Is it not enough  of an incentive                                                                    
     to  say  "we're   going  to  give  this   back  to  you                                                                    
     individually as  a company,  but we'll  let you  run it                                                                    
     out,  so once  you've reached  your maximum  losses, in                                                                    
     the  year  2007, you  can  use  it 2008,  2009,  2015."                                                                    
     That's pretty generous, ... I  think the value of being                                                                    
     able  to write  those losses  off into  the future  for                                                                    
     anybody is  great, and  the fact  that we  haven't even                                                                    
     put a 50 percent threshold on it is great.                                                                                 
1:07:19 PM                                                                                                                    
MR. MARKS  said this incentive  allows new investors  to monetize                                                               
their  losses immediately.    He explained  that  this is  called                                                               
"back end  loading the  fiscal system" which  means that  the tax                                                               
obligations are  moved farther back in  time.  He noted  that net                                                               
present value is  very important to investors and  rate of return                                                               
depends on timing.  He said  there are more than three companies,                                                               
and if there  are at least two [companies] in  the market for the                                                               
credits, they  will sell at  a high [rate].   He opined  that the                                                               
vitality of the market would be good.                                                                                           
1:09:19 PM                                                                                                                    
CO-CHAIR  SAMUELS remarked  that some  of the  companies will  be                                                               
finding oil, and he asked if  the model shows, per dollars spent,                                                               
how much more production is expected.                                                                                           
MR. MARKS replied that they would  create a model to see how this                                                               
might work.                                                                                                                     
REPRESENTATIVE  BERKOWITZ  said  the  floor  for  the  claw  back                                                               
provision is $40  per barrel oil, and the credit  does not have a                                                               
floor.  He asked what would  happen to state revenue if there was                                                               
a large amount of credit and the price of oil was low.                                                                          
MR. MARKS replied that limiting the  credits to 20 percent of the                                                               
tax liability was intended to reduce this problem.                                                                              
REPRESENTATIVE BERKOWITZ  asked if the department  had considered                                                               
the possibility  of the  credits exceeding  the revenue  from new                                                               
production and  inquired as to  the type of protection  the state                                                               
would have in this situation.                                                                                                   
1:11:21 PM                                                                                                                    
MR. MARKS opined that the amount  of new investments subject to a                                                               
credit relative  to the amount  of existing oil  production means                                                               
it would  take an extraordinary  amount of investment  and credit                                                               
sales to make  a noticeable dent in the total  tax statement, but                                                               
he said he would attempt to quantify this.                                                                                      
REPRESENTATIVE GARA  said the bill  now raises $1.5  billion less                                                               
than it  did on Friday, and  it's a bill that  allows for changes                                                               
[to the] gas tax law as well as the oil tax law.  He said:                                                                      
     So,  on  the credit  you  have  a system  where  people                                                                    
     who've been  coming to  the state  saying, "We  want to                                                                    
     develop Alaska's  gas."  The  big cost item is  the gas                                                                    
     pipeline,  but ...  the gas  is  marketable apart  from                                                                    
     that.   Now we're  giving them,  in addition,  a credit                                                                    
     that  they  can now  take  off  of someone  else's  oil                                                                    
     taxes.    ...  So,  I'm   wondering,  if  the  gas  was                                                                    
     producible and marketable,  leaving the pipeline aside,                                                                    
     before, why  are we  now coming  up with  an additional                                                                    
     credit for  gas ...  out of  oil taxes?   And  the real                                                                    
     question I  want to ask is  this:  Given that  it's now                                                                    
     extended to gas credits on  oil taxes ... it seems more                                                                    
     compelling  to  me that  what  we  should be  doing  is                                                                    
     giving  a  credit to  be  used  on the  project  you're                                                                    
     getting  the credit  for  once  it becomes  profitable.                                                                    
     ...  People are  going to  invest in  gas because  they                                                                    
     believe it's  going to be  a profitable gas deal.   The                                                                    
     time  value  of money,  I  know,  is important  to  the                                                                    
     companies, but it's  important to the state,  too.  So,                                                                    
     what would be wrong with  saying "You get the credit on                                                                    
     your gas investment  when your gas comes  online."  You                                                                    
     know you're  going to get  it; it's  going to be  a few                                                                    
     years later, that's a big benefit.   Why make it such a                                                                    
     benefit now  that you can  take it off your  oil taxes?                                                                    
     What's the big detriment to  just saying [that a] four-                                                                    
     year  gas  project  ...   becomes  profitable  when  it                                                                    
     becomes profitable; you get a credit later on.                                                                             
1:13:54 PM                                                                                                                    
MR.  MARKS  replied that  the  main  upstream investment  is  Pt.                                                               
Thompson.  He explained that this  plan makes Pt. Thompson a more                                                               
attractive investment, which would incentivize the gas line.                                                                    
REPRESENTATIVE  GARA  said  that  his earlier  comments  were  in                                                               
regard  to  Pt.  Thompson.    He stated  that  Pt.  Thompson  was                                                               
profitable  prior  to  this,  and  now  a  tax  credit  is  being                                                               
developed as if this additional incentive is needed.                                                                            
MR. MARKS  replied that Pt.  Thompson's profitability is  an open                                                               
question  and to  incentivize Pt  Thompson would  incentivize the                                                               
gas line as a result.                                                                                                           
1:16:13 PM                                                                                                                    
MS.  WILSON,  in  response  to  a  question  from  Representative                                                               
Rokeberg, noted  that the limit of  credits to 20 percent  of the                                                               
tax liability can be found on Page 6(e).                                                                                        
REPRESENTATIVE SEATON asked for an  analysis showing the state as                                                               
a  willing  buyer at  90  percent  and  making this  a  mandatory                                                               
option.   He opined that the  only downside would be  that if oil                                                               
prices  were low,  the state  would not  be protected  by the  20                                                               
percent if  purchasing the credits  was the only option.   Making                                                               
it  optional  removes  the  "downside", which  would  be  a  good                                                               
investment.  In response to a question from Mr. Marks, he said:                                                                 
     The state would have ... a  bid ... that they would buy                                                                    
     the credits for  90 percent.  In other  words, ... [two                                                                    
     oil  companies]  ...  producing, they're  paying  their                                                                    
     taxes.  ...   Instead of us having  those two companies                                                                    
     sell amongst themselves, ... and  ... at 85 percent the                                                                    
     second company that  has the tax they're  going to pay,                                                                    
     make  15 percent  on it,  if we  would have  a standing                                                                    
     offer  that  we--cancelable  at our  option--would  buy                                                                    
     those  credits,  [at 90  percent].    That means  we're                                                                    
     getting a  10 percent reduction  on the amount  that we                                                                    
     have to  pay, and  yet, [company  A] would  actually be                                                                    
     ... if a  major [oil company] would be  out paying them                                                                    
     85 percent, they  would be getting 5  percent more back                                                                    
     to that company.   We would be saving 10  percent.  ...                                                                    
     Can you look at that in  your model and see if it makes                                                                    
     any difference?                                                                                                            
MS.  WILSON  opined that  the  concept  of allowing  transferable                                                               
credits was  to keep  the state  out of the  process.   She added                                                               
that if  the state were  to get involved, the  simplest mechanism                                                               
may be a  refundable credit.  She remarked that  there may not be                                                               
much advantage to being the "middle man."                                                                                       
CO-CHAIR  SAMUELS said  that  he does  not see  this  as being  a                                                               
"middle man," and instead suggested  looking at the total loss of                                                               
tax  revenue to  the state.   If  the state  buys the  credit for                                                               
$195,000 instead of taking the  $200,000 loss, the state would do                                                               
better.  He noted that the floor  does not need to be 95 percent;                                                               
it could be  whatever the "break even" point is.   He stated that                                                               
this would ensure that the state received the best scenario.                                                                    
REPRESENTATIVE  SEATON   stated  that  he  is   talking  about  a                                                               
refundable credit, but it needs  to be optional to take advantage                                                               
of when oil prices are low.                                                                                                     
1:21:05 PM                                                                                                                    
MR. MARKS, moving  on to page 9  of the handout, said  there is a                                                               
mechanism  in  the bill  for  converting  losses to  credits  and                                                               
selling them.   "Everything is  exactly the same, the  benefit is                                                               
the same, you're  back-end loading the tax, he said."   These two                                                               
mechanisms can work together.   If pure wildcatters came into the                                                               
state to explore, people with no  connection to the state, and if                                                               
they found  oil, they would  make a lot of  money.  But,  if, for                                                               
example, they spend  $10 million and drill a dry  hole and leave.                                                               
Under the  current system, they  would get nothing.   They're out                                                               
the entire $10  million.  But under the PPT,  between the ability                                                               
to  convert the  $10 million  loss to  a credit  and selling  the                                                               
credit, the state would actually be  paying for 40 percent of the                                                               
cost of the dry hole.  He continued:                                                                                            
     So, what's happening with the  PPT?  We're sharing risk                                                                    
     where we  weren't before.  Also  note, if we went  to a                                                                    
     25/20 system,  we'd be  sharing 45  percent of  the dry                                                                    
     hole cost  as well.   So, that's  one thing to  keep in                                                                    
     mind   when   contemplating   higher  tax   rates,   in                                                                    
     situations like this, you're also sharing more risk.                                                                       
REPRESENTATIVE  SEATON asked  if selling  losses and  operational                                                               
costs are both taken as credits.                                                                                                
MR. MARKS replied  that "page 8 refers to selling  the losses, an                                                               
operation loss,  that's converted to  a credit, and you  sell the                                                               
credit."   He said  page 9  explains the  credit received  from a                                                               
qualified capital expenditure,  which is sold directly.   "So the                                                               
first example was  converting a loss to a credit  and selling the                                                               
credit,  and the  second example  is where  you generate  credits                                                               
directly and sell them."                                                                                                        
REPRESENTATIVE  SEATON  asked  if  drilling  a  dry  hole  is  an                                                               
operating expenditure or a capital expenditure.                                                                                 
MR. MARKS  replied that  much of  what occurs  during exploratory                                                               
drilling qualifies as capital expenditure per [HB 488].                                                                         
1:25:05 PM                                                                                                                    
MR.  MARKS, referring  to page  10, said  that under  the current                                                               
system, small  fields pay little  or no tax.   The administration                                                               
feels this should  continue.  He opined that  small companies are                                                               
good for the  state, and the best way to  help these companies is                                                               
with a tax-free allowance.  He said:                                                                                            
     Our goal was  that at about a $50  market price--or $40                                                                    
     at  the  wellhead  specifically--a  5,000  barrel-a-day                                                                    
     field should pay  no tax.  And at  lower prices, larger                                                                    
     fields  should pay  no tax,  but at  higher production,                                                                    
     there should  be a lower  price threshold.   We'll show                                                                    
     you how this works.  Go  back to the costs we laid out-                                                                    
     your cost  estimates yesterday--the  amount of  cost to                                                                    
     get from  the West Coast  ... back  to a net  income is                                                                    
     about  $14, if  you  look at  both  the downstream  and                                                                    
     upstream  costs.   That's for  the North  Slope.   Cook                                                                    
     Inlet  is  not dissimilar,  but  Cook  Inlet has  lower                                                                    
     downstream and higher upstream costs.   So, if you take                                                                    
     about a $53 per barrel  market price on the West Coast,                                                                    
     you  take  these  $14  in deductions  to  get  the  net                                                                    
     income, add, say,  $1 back for the  credit, you're left                                                                    
     with  net  revenue  of $40.    At  5,000  barrels-a-day                                                                    
     that's $200,000  a day in  income, and  [multiplied by]                                                                    
     365 days  a year is $73  million in income.   So, a $73                                                                    
     million allowance,  at a $53  per barrel price,  or $40                                                                    
     net  income, a  5,000 barrel-a-day  field would  pay no                                                                    
     tax.  If [the prices are  lower], say $30, with the $73                                                                    
     million,  the way  the arithmetic  works, the  first 12                                                                    
     thousand barrels  a day would pay  no tax.  Or,  if you                                                                    
     have higher  production, say 20,000  barrels a  day, it                                                                    
     would be at  $23 per barrel, ... the  first 20 thousand                                                                    
     barrels a day would pay no tax.                                                                                            
1:28:12 PM                                                                                                                    
MR. MARKS  said the allowance would  apply to each company  up to                                                               
$73 million.   If a company  has $40 million in  losses, it would                                                               
only be able to take a  $40 million allowance.  Not all companies                                                               
will take the  full $73 million, he said.   Current producers are                                                               
estimated to  have 7 full  deductions.   With the 20  percent tax                                                               
rate  applied to  the  $73 million,  it is  about  a $14  million                                                               
reduction in  net tax per company  per year.  He  said this would                                                               
be $100 million a year in less  taxes.  He opined that there will                                                               
be few small companies coming to  the North Slope to realize this                                                               
credit.  Under the current  system [Pioneer and Kerr McGee] would                                                               
pay zero in severance tax  and produce around 20 thousand barrels                                                               
per day.   The administration does not believe  that thousands of                                                               
new companies  will come  in and  take advantage  of this  in the                                                               
North Slope.  If new companies  do come in, he opined, they would                                                               
look at  new targets  such as  the Nenana  Basin.   He said  if a                                                               
company  finds a  prospect in  one basin,  the next  company will                                                               
come  in  and  take  advantage  of  the  allowance,  so  it  will                                                               
encourage smaller  companies.  However, this  would create stress                                                               
between old and  new investors.  Companies could not  split up in                                                               
order to  take further  advantage, he  stated, because  there are                                                               
anti-splitting provisions  in Section 21  of the bill.   He added                                                               
that  at higher  prices,  after the  first  5,000 barrels,  there                                                               
would be a tax.                                                                                                                 
1:32:17 PM                                                                                                                    
CO-CHAIR SAMUELS said  that he envisions the  same problems found                                                               
in the economic limit factor  (ELF); Prudhoe Bay will decline and                                                               
the state  will be  left with  "a bunch"  of small  companies not                                                               
paying any  tax.   He asked how  the state can  be sure  that the                                                               
North Slope  will not attract  "a bunch" of [companies]  with the                                                               
allowance.   He  noted  that in  the short-term,  this  is not  a                                                               
problem, but added  that 20 years from now, "there  we are again,                                                               
wishing we had the $73 million."                                                                                                
1:33:42 PM                                                                                                                    
MR.  MARKS said  the North  Slope oil  is heavy  and viscous  and                                                               
small companies  won't be interested in  it.  It takes  $8 barrel                                                               
just to get to market, he stated.                                                                                               
REPRESENTATIVE LEDOUX asked about the anti-splitting provision.                                                                 
CO-CHAIR SAMUELS said that may be covered later.                                                                                
REPRESENTATIVE BERKOWITZ commented  that there has been  a lot of                                                               
discussion  regarding  how  the   state  will  incentivize  small                                                               
companies.   He inquired as to  how the bill deals  with the cost                                                               
of tariff and transportation.                                                                                                   
MR.   MARKS  said   the  Trans-Alaska   Pipeline  System   (TAPS)                                                               
settlement  methodology (TSM)  ends  in the  year  2011, and  the                                                               
state  has the  ability to  challenge it  in the  year 2009.   He                                                               
opined that the tariff will be noticeably reduced.                                                                              
REPRESENTATIVE  BERKOWITZ asked  if  that decline  in tariff  was                                                               
factored into the bill.                                                                                                         
MR. MARKS  said no.   He added  that the  tariff notwithstanding,                                                               
there are large  challenges for small companies  operating on the                                                               
North Slope.                                                                                                                    
REPRESENTATIVE  BERKOWITZ  asked  about  a  similar  analysis  at                                                               
different oil prices.                                                                                                           
MR.  MARKS said  the  $40  and the  5,000  barrels were  somewhat                                                               
arbitrary;  it was  just a  judgment call  based on  the goal  to                                                               
continue the current treatment for small fields.  He continued:                                                                 
      Under the old bill, again, take the Pioneer and Kerr-                                                                     
     McGee prospects  that are around 20  thousand barrels a                                                                    
     day.   They're  going to  pay tax  on the  last 15,000.                                                                    
     Under the  current bill they  would pay nothing.   They                                                                    
     came  to   the  slope  ...   with  a  certain   set  of                                                                    
REPRESENTATIVE  BERKOWITZ  asked who  made  the  judgment on  the                                                               
amounts used.   He said  that the  legislature would like  to see                                                               
another analysis at different tax rates and dollar amounts.                                                                     
1:39:31 PM                                                                                                                    
REPRESENTATIVE GARA said that the bill  is trying to mimic a rule                                                               
that  gives a  5,000 barrel-per-day  field tax-free  status.   He                                                               
opined that  most fields  of this size  are very  profitable, and                                                               
would need to be shown otherwise.   He expressed concern that the                                                               
current plan  helps the  bigger companies  more than  the smaller                                                               
companies.  He  asked, "Why give the $73 million  tax-free to the                                                               
biggest companies in  order to give a smaller portion  of that to                                                               
the smaller companies?   Isn't that giving way too  much money to                                                               
reach the goal?"                                                                                                                
MR. MARKS said that each company  is treated the same in terms of                                                               
the tax code.  He  added that giving companies different benefits                                                               
is an invitation for "monkey business."                                                                                         
1:42:27 PM                                                                                                                    
REPRESENTATIVE SEATON asked if the  allowance is only against the                                                               
PPT.   Referring to  page 14  of the handout,  he asked  how many                                                               
full deductions are estimated at 25/50.                                                                                         
MR. MARKS confirmed  that the allowance is only  against the PPT.                                                               
In regard to  the full deductions, he said that  at the long-term                                                               
price it would be less than seven companies.                                                                                    
REPRESENTATIVE  BERKOWITZ  asked  what  the  cost  to  the  state                                                               
treasury would be if the allowance were applied today.                                                                          
MR. MARKS replied  that it would be about $100  million per year,                                                               
the bulk  of which would go  to the seven biggest  companies.  He                                                               
explained that  the seven is  equivalent and noted that  some are                                                               
partial allowances.   The three  big companies would  receive it,                                                               
along with a few of the smaller companies.                                                                                      
REPRESENTATIVE BERKOWITZ  said the big  three would get  the full                                                               
$73  million,  however, the  smaller  companies  would be  "doing                                                               
cartwheels" if  they were  to make  the full  amount.   He opined                                                               
that the three big companies would get $210 million.                                                                            
MR. MARKS replied that after tax it is $14 million per company.                                                                 
REPRESENTATIVE BERKOWITZ noted that  the federal government would                                                               
receive some money as well.                                                                                                     
MR. MARKS said yes.                                                                                                             
1:45:09 PM                                                                                                                    
CO-CHAIR   SAMUELS  said   that  this   will  incentivize   small                                                               
REPRESENTATIVE BERKOWITZ remarked that this is inefficient.                                                                     
REPRESENTATIVE SEATON  said that  in a previous  presentation the                                                               
emphasis was to  move away from a field-by-field  tax and instead                                                               
go to  a company-wide tax.   He  stated that the  proposed system                                                               
seems to be  field by field, and asked if  the state will receive                                                               
the worst  of both systems  by having  the field by  field within                                                               
the company-wide system.                                                                                                        
MR. MARKS said the allowance is company wide, not per field.                                                                    
REPRESENTATIVE  LEDOUX said  that she  can understand  the desire                                                               
not to  treat the companies  differently, but suggested  that the                                                               
state differentiate by  the amount of revenue  per company, which                                                               
is done in tax codes "all the time."                                                                                            
MR. MARKS said  that this is possible;  however, stresses between                                                               
new and old  companies remain a concern.  If  BP, for example, is                                                               
looking at a small field and  does not receive the allowance that                                                               
a  [smaller  company]  does,  this  puts  BP  at  a  professional                                                               
disadvantage.  He added that leveling the playing field is good.                                                                
1:47:42 PM                                                                                                                    
REPRESENTATIVE  GARA remarked  that  it may  make  more sense  to                                                               
require  a  tax  after  a  profit is  made,  as  the  company  is                                                               
receiving a  20 percent  tax credit and  a 20  percent deduction,                                                               
and the  PPT says  no tax  until a  company makes  a profit.   He                                                               
added that  it would also  make sense  to grant the  allowance to                                                               
the areas the state is trying to reach.                                                                                         
MR. MARKS reiterated  that small producers are  not interested in                                                               
heavy oil because it is too expensive.                                                                                          
REPRESENTATIVE  GARA asked  why the  state  does not  aim at  the                                                               
areas  where it  is  trying to  encourage  [development] and  not                                                               
include other  areas such  as Prudhoe  Bay, Alpine  and Northstar                                                               
MR. MARKS replied that uniform  treatment is important, otherwise                                                               
there would be room for "monkey business."                                                                                      
CO-CHAIR  SAMUELS, in  regard  to  the anti-splitting  provision,                                                               
used the Kuparuk River Unit as  an example in explaining the fear                                                               
that  a  large company  would  split  into  a series  of  limited                                                               
liability  companies (LLC).   If  this were  to occur,  the money                                                               
would still  flow to  the same company,  and each  individual LLC                                                               
would receive the $73 million allowance.   He noted that the anti                                                               
splitting provision in Section 21  of the bill would be explained                                                               
in detail during the next presentation.                                                                                         
1:50:40 PM                                                                                                                    
MR. MARKS, in  regard to the PPT  and the effect it  will have on                                                               
Cook  Inlet,  said that  Cook  Inlet  is  80  percent gas.    The                                                               
industry at  Cook Inlet  is evolving; oil  and gas  production is                                                               
decreasing,  as many  of  the  assets in  the  area  are old  and                                                               
depreciated out.   He said that there is  increased investment in                                                               
exploration, particularly  for gas.  In  addition, the regulatory                                                               
division  has  granted  contract  provisions  that  require  high                                                               
prices.   He noted that  Chevron has been awarded  contracts that                                                               
allow it to sell gas to ENSTAR at  the Henry Hub price.  He noted                                                               
that this  price is  historically higher  than it  has been.   He                                                               
remarked that  gas prices have  gone up since  Hurricane Katrina.                                                               
The  impact of  oil  taxes  on Cook  Inlet  won't be  significant                                                               
unless  prices are  high  and  profits are  earned.   Other  than                                                               
Chevron, most  of the  companies in  Cook Inlet  are small.   Gas                                                               
taxes  on existing  fields will  go up  as a  result of  the PPT,                                                               
particularly due  to the current  prices.   He said that  the PPT                                                               
will encourage exploration in Cook Inlet.                                                                                       
MR. MARKS went  on to explain that there is  a gas economic limit                                                               
factor  (ELF).   The Cook  Inlet gas  fields produce  600 million                                                               
cubic feet (mcf)  per day, which is about 200  billion cubic feet                                                               
per year.  He stated that this  gas is shipped all over the world                                                               
for different uses.  The average  ELF in Cook Inlet is .50, which                                                               
implies  6,000 mcf  per well,  per day,  tax-free.   He explained                                                               
that  the  revenue  from  tax-free   gas  is  intended  to  cover                                                               
operating costs, adding  that the estimated operating  cost is 50                                                               
cents.   Mr. Marks said that  the operating costs are  $3,000 per                                                               
well,  per day.   The  revenue from  the $3,000  tax-free gas  is                                                               
worth $21,000, so  with the current ELF, the  state is recovering                                                               
three times  what the  operating costs  should be.   This  is the                                                               
reason that the tax rates on existing fields will increase.                                                                     
1:58:22 PM                                                                                                                    
MR. MARKS stated that the  crossover point for existing fields is                                                               
estimated at about  $4.00/mcf.  An increase to  $5/mcf would mean                                                               
an increase of  $25 million annually.  This is  out of $1 billion                                                               
in gross  revenues.  He  stated that Cook Inlet  gas [production]                                                               
is  declining,  and the  state  hopes  the PPT  will  incentivize                                                               
development in  Cook Inlet,  adding that  new production  may see                                                               
reduced taxes as a result.                                                                                                      
CO-CHAIR SAMUELS expressed  concern with adding "and  gas" to the                                                               
entire bill, and asked  if this was done to help  Cook Inlet.  He                                                               
opined  that it  is irrelevant  because  North Slope  gas has  no                                                               
MR. MARKS said no, and stated  that the PPT was designed to apply                                                               
to all  upstream assets  from statewide  oil and  gas.   He added                                                               
that  upstream expenditures  would be  subject to  deductions and                                                               
2:00:43 PM                                                                                                                    
MR. MARKS, in response to  a question from Co-Chair Samuels, said                                                               
that  the $73  million  allowance is  limited  to the  companies'                                                               
income and applies  to each producer in the  state, regardless of                                                               
CO-CHAIR SAMUELS asked how many  Cook Inlet fields would be above                                                               
the $73 million threshold.                                                                                                      
MR.  MARKS  replied  that  while  he  is  not  able  to  disclose                                                               
confidential data, a person may look  at this and draw his or her                                                               
own conclusions.                                                                                                                
REPRESENTATIVE GARA  noted that  the $73  million applies  to all                                                               
the Cook  Inlet producers, and  asked if any producers  make more                                                               
than that amount in profit.                                                                                                     
MR.  MARKS  replied  that  he   is  uncomfortable  talking  about                                                               
specific  taxpayers in  a  public setting  and  suggested that  a                                                               
meeting time be arranged to discuss this.                                                                                       
REPRESENTATIVE WILSON asked for an  idea of what an [oil] company                                                               
would pay if BOE was over or under 27 what would occur.                                                                         
2:03:20 PM                                                                                                                    
MR. MARKS replied that Chevron taxes  will go up and Marathon oil                                                               
taxes will go up.                                                                                                               
REPRESENTATIVE  ROKEBERG  asked  if,  with the  current  ELF  and                                                               
current  pricing,  there will  be  increased  revenues from  Cook                                                               
Inlet with the PPT.                                                                                                             
MR. MARKS said it depends on operating and capital costs.                                                                       
REPRESENTATIVE ROKEBERG  said that the  total amount of  sales in                                                               
Cook Inlet may not exceed the $4/mcf.                                                                                           
MR. MARKS said there are old  contracts that will not require any                                                               
tax under the bill.                                                                                                             
MR.  MARKS,   in  response   to  questions   from  Representative                                                               
Rokeberg, said  that the  additional $25  million is  an estimate                                                               
and added  that if  the Cook Inlet  gas production  declines over                                                               
the years, the  estimate would be proportionally lower.   He said                                                               
that the  PPT would apply  to all the gas  in the state,  and the                                                               
natural gas liquids (NGL) on  the North Slope are considered gas,                                                               
because they are a product of  gas processing.  He confirmed that                                                               
the same terms and conditions apply to gas and oil.                                                                             
2:07:22 PM                                                                                                                    
REPRESENTATIVE  GARA  asked  for   projections  showing  how  the                                                               
proposal  would  compare  to  current  law  or  North  Slope  gas                                                               
MR. MARKS said that could be provided.                                                                                          
CO-CHAIR SAMUELS  asked if it  would it be  more fair to  say the                                                               
rules were  written for Cook Inlet  and a PPT, rather  than a gas                                                               
line, which has a different set of rules and regulations.                                                                       
MR. MARKS replied that the provisions  in the PPT that affect Pt.                                                               
Thompson development may  provide a "big incentive"  to build the                                                               
gas line.                                                                                                                       
2:09:06 PM                                                                                                                    
MR.  MARKS  concluded  by  saying  that  the  bill  reflects  the                                                               
administration's   judgments   on   attracting  small   and   new                                                               
investments.   He  noted that  for the  new investors,  taxes may                                                               
increase at  high prices, which  is appropriate.  He  stated that                                                               
the  administration has  briefed the  potential new  investors on                                                               
the bill  and has  not received a  response regarding  where they                                                               
stand  on the  issue.   He  encouraged the  committee members  to                                                               
"listen  to  what  they  have  to say,"  and  remarked  that  the                                                               
administration  looks  forward  to crafting  the  legislation  to                                                               
assist the new investors.                                                                                                       
REPRESENTATIVE  RAMRAS  explained  the  situation  regarding  the                                                               
Nenana  Basin   and  the  difficulty  in   getting  resources  to                                                               
Fairbanks.    He stated  that  alternative  energy is  needed  in                                                               
Fairbanks and  asked for suggestions  on how this might  be done.                                                               
He  asked  to  be  taken through  the  process  of  incentivizing                                                               
exploration in the Nenana Basin.                                                                                                
MR.  MARKS explained  that under  the current  system the  fields                                                               
would be small and pay  no production price, regardless of price,                                                               
which is an  incentive.  He remarked that the  $73 million is the                                                               
state's attempt to  incentivize.  He said that  under the current                                                               
system,  the  state does  not  help  with capital  and  operating                                                               
costs.  Under the proposed system,  the state will pay 40 percent                                                               
of costs from day one.                                                                                                          
2:12:40 PM                                                                                                                    
REPRESENTATIVE RAMRAS asked if a  company that spends $20 million                                                               
and comes  up with  a dry  hole would be  able to  recapture $3.6                                                               
million by selling credits.                                                                                                     
MR. MARKS replied  that between converting losses  to credits and                                                               
the credit itself,  the company would have $8  million in credits                                                               
to  sell.   He  added  that  90 percent  of  $8  million is  $7.2                                                               
million,  and under  the  status quo  the  company would  receive                                                               
nothing.   He reiterated  that under the  net present  value, the                                                               
company would  receive the $7.2  million on day one,  rather than                                                               
being required to wait until money is earned.                                                                                   
CO-CHAIR RAMRAS, in  regard to bringing the gas  to market, asked                                                               
if the transport for a small line would be covered.                                                                             
MR. MARKS replied  that it is not, and he  explained that the gas                                                               
cuts off upstream of the lease boundaries.                                                                                      
2:14:04 PM                                                                                                                    
CO-CHAIR RAMRAS  said that the  committee previously  discussed a                                                               
gas treatment plant and indicated that  he was unsure of what the                                                               
specific reasoning was.                                                                                                         
CO-CHAIR SAMUELS  asked whether  credits could buy  the treatment                                                               
plant or the tariff  should pay for it, and he  asked the about a                                                               
production facility,  which is used  to process excess  gas, "but                                                               
you need  those whether you  have a gas line  or not."   He noted                                                               
that  small players  have  to  pay to  use  the large  companies'                                                               
processing  plants.   He asked  if the  state wants  to encourage                                                               
[small players]  to build their  own, which would  encourage more                                                               
oil investments.  "So they don't  have to pay the major producers                                                               
for the use of their facilities as  well as the use of TAPS."  He                                                               
     The  GTP  [gas treatment  plant]  is  a facility  which                                                                    
     makes the gas - pipeline  quality gas to go.  Everybody                                                                    
     will have to  go through the GTP.  That  should be paid                                                                    
     for by tariffs.  The users  - part of tariffs should go                                                                    
     through there, the credits ...  there are no credits in                                                                    
     the bill  which would allow to  use for the GTP.   They                                                                    
     are different animals on what  they're needed for.  The                                                                    
     gas   processing  plant   is  needed,   even  for   oil                                                                    
     production.   We have to  do something with the  gas to                                                                    
     reinject.  The  GTP is solely a  gas pipeline facility.                                                                    
     That should  be paid for  by tariffs and by  users, and                                                                    
     not by tax credits.                                                                                                        
MR. MARKS agreed.                                                                                                               
2:15:45 PM                                                                                                                    
The committee took an at-ease from 2:16 to 2:27.                                                                                
2:27:16 PM                                                                                                                    
DAN DICKINSON, Consultant  to the Governors office,  said that in                                                               
addition to  previous handouts, there  is a new  sectional titled                                                               
"SB 305/HB 488, The Rest of the PPT Story."                                                                                     
ROBERT  MINTZ,  Assistant Attorney  General,  Oil,  Gas &  Mining                                                               
Section, Civil Division,  Department of Law, spoke  of an earlier                                                               
question  as  to  the  relationship  between  the  two  types  of                                                               
credits.   He  said  there are  two cost  concepts  in the  bill.                                                               
There  are lease  expenditures,  which cover  all the  deductible                                                               
costs of exploration, development,  and production, and there are                                                               
capital expenditures, which are a  subset of a lease expenditure.                                                               
He continued:                                                                                                                   
     Capital expenditures qualify for  a capital credit, and                                                                    
     all  of  these  expenditures qualify  for  a  deduction                                                                    
     against   gross  value.      But  not   all  of   these                                                                    
     expenditures qualify  for the capital credit.   I think                                                                    
     one  of  the  points  that  Representative  Seaton  was                                                                    
     getting at,  is when  you drill  a well,  a lot  of the                                                                    
     expenses  are   what  look  like,   we  think   of  as,                                                                    
     operational expenses, yet  they're considered a capital                                                                    
     expenditure.     That's   because  the   definition  of                                                                    
     "qualified  capital  expenditure"   includes  not  only                                                                    
     costs  of   acquiring  plant  and  equipment   that  is                                                                    
     typically   considered  a   capital  asset,   but  also                                                                    
     [includes] what are  considered "intangible development                                                                    
     costs" under the Internal Revenue  Code, and that's the                                                                    
     cost  of  drilling   a  well.    It   is  important  to                                                                    
     understand that not everything that  is deductible as a                                                                    
     lease   expenditure  also   qualifies  for   a  capital                                                                    
     investment credit.                                                                                                         
2:31:03 PM                                                                                                                    
MR.  MINTZ, referring  to  page  3 of  the  handout titled  "Bill                                                               
Slideshow Pt  1& 2", said  that the fundamental provision  of the                                                               
production tax is  AS 43.55.011(a), and the  highlights include a                                                               
single tax  on oil and  gas which is equal  to 20 percent  of the                                                               
net value.   He said  that "net value" is  a new concept  and the                                                               
definition can be  found in AS 43.55.160.  The  net value is made                                                               
up of three  elements and begins with the gross  value of oil and                                                               
gas  at  the  point  of  production.   There  are  two  types  of                                                               
deductions:  lease   expenditures  and   transitional  investment                                                               
expenditures.  He noted that a  portion of AS 43.55.160(a) is not                                                               
included in the handout, and  this portion begins with "Except as                                                               
provided in (f) and  (i) of this section."  Mr.  Mintz went on to                                                               
say that  (i) refers  to the $73  million allowance,  which could                                                               
also be considered a deduction.   In regard to net value, he said                                                               
the definition can be found in Section  31 of the bill.  He noted                                                               
that the current definitions have  been changed.  The main change                                                               
moves the point of production  downstream of gas processing.  The                                                               
gas  processing  is  then  deductible   and  subject  to  capital                                                               
expenditure credit.                                                                                                             
MR.  MINTZ moved  on  to page  6  and said  that  this shows  the                                                               
existing  law  for  calculating  gross  value  at  the  point  of                                                               
production.   The bill does  not change the  fundamental concept.                                                               
He  explained  that this  page  shows  the  net back  method  for                                                               
calculating  value.   To calculate,  the net  back method  begins                                                               
with the  value of oil  and gas where it  is sold or  disposed of                                                               
and subtracts transportation costs.   The most significant change                                                               
to the calculation  of gross value at the point  of production is                                                               
allowing the department to authorize  producers to use simplified                                                               
calculation formulas,  when appropriate.   For example,  if there                                                               
is  a simple  way  to calculate  the  value of  oil  and gas  for                                                               
royalty  purposes, under  leases that  the Department  of Natural                                                               
Resources  (DNR) administers,  the  department  could then  allow                                                               
this calculation to be used for tax purposes.                                                                                   
MR. MINTZ,  referring to page  9, said that  "lease expenditures"                                                               
is  defined   in  AS   43.55.160(c).     He  stated   that  lease                                                               
expenditures  are  the  total statewide  costs  of  the  producer                                                               
incurred upstream  at the point  of production, and they  must be                                                               
direct,  ordinary,   and  necessary   costs  of   exploring  for,                                                               
developing,  or producing  oil or  gas.   He  explained that  the                                                               
department is  able to determine  how to interpret  the statutory                                                               
terms and  is referred  to two  main sources  for guidance.   The                                                               
first  is   industry  practice,  which  is   expressed  in  joint                                                               
operating agreements.  Under these  agreements, an operator bills                                                               
the lessees  for the exploration  and production costs.   He said                                                               
that these  practices are well  developed.  The second  source of                                                               
guidance  is   the  DNR  standards  regarding   which  costs  are                                                               
deductible for net profit share lease calculations.                                                                             
2:36:46 PM                                                                                                                    
REPRESENTATIVE SEATON  asked if  industry practice  and standards                                                               
and unit agreements are different for individual fields.                                                                        
MR. MINTZ  said yes, and the  department has the ability  to look                                                               
at examples  of practices  both in the  state and  throughout the                                                               
REPRESENTATIVE  SEATON asked  if  it was  company  wide or  field                                                               
MR. MINTZ  said the operating  agreement is typically for  a unit                                                               
and would  be applied to  the different lessees with  an interest                                                               
in the unit.                                                                                                                    
REPRESENTATIVE SEATON  asked if the  costs that are  deducted are                                                               
company wide but determined based on a particular field.                                                                        
MR. DICKINSON  replied that the  operator will spend  the dollars                                                               
and then the owner looks at  the costs and decides how to approve                                                               
them.   The owner will pay  a percentage of the  cost incurred at                                                               
the  site.   He explained  that there  would typically  be "joint                                                               
venture"  billing for  a field.    The operator  would bill  each                                                               
owner a  piece of  the cost.   He said  that a  field owned  by a                                                               
single company may result in  some problems, adding that it would                                                               
be  necessary to  develop  rules  regarding how  to  look at  the                                                               
costs.   Referring to  the handout,  he noted  that in  regard to                                                               
industry  practice,   there  must   be  a  minority   owner  with                                                               
substantial bargaining power.                                                                                                   
2:40:07 PM                                                                                                                    
MR.  DICKINSON, in  response to  a  question from  Representative                                                               
Seaton,  confirmed  that  the  regulations   have  not  yet  been                                                               
written; however, the  intent is for the costs to  be relative to                                                               
the particular field and would not be company wide.                                                                             
REPRESENTATIVE  BERKOWITZ  asked   about  the  term  "substantial                                                               
weight" in  regard to  assessing costs, and  inquired as  to what                                                               
would happen if  there was a conflict  between industry standards                                                               
and DNR standards.                                                                                                              
2:41:28 PM                                                                                                                    
MR. MINTZ replied that "substantial  weight" gives the department                                                               
the ultimate authority to make a  decision.  He stated that while                                                               
he  is  unable to  predict  how  a  conflict would  be  resolved,                                                               
industry  practice  is a  broad  concept  that varies  with  each                                                               
operating agreement.  He opined  that the DNR regulations will be                                                               
within  the  same range  as  the  industry practices;  therefore,                                                               
conflicts would be rare or nonexistent.                                                                                         
REPRESENTATIVE BERKOWITZ noted that it  is important to include a                                                               
statement of legislative intent.                                                                                                
MR. MINTZ  agreed.  In regard  to an earlier comment  made by Mr.                                                               
Dickinson, he said:                                                                                                             
      It's important to understand that industry practice--                                                                     
     or joint  operating agreements--can  have, potentially,                                                                    
     two different roles under [AS  43.55.160].  One role is                                                                    
     in  a   source  of  the  general   standards  that  the                                                                    
     department  would apply  in  determining whether  costs                                                                    
     are  deductible.    For   example,  if  the  department                                                                    
     surveyed  a number  of joint  operating agreements  and                                                                    
     found  that,   say,  90  percent  of   them  allowed  a                                                                    
     particular cost  and 10 percent  of them did  not, then                                                                    
     the department  might determine that  that cost  is not                                                                    
     allowed in  general.   But, the  second way  that joint                                                                    
     operating agreements  can play a  role is that  the end                                                                    
     of this subsection says that,  in particular cases, the                                                                    
     department  may allow  a  producer  to actually  simply                                                                    
     rely on the billings  under a joint operating agreement                                                                    
     as the  lease expenditures.   So  that you  wouldn't go                                                                    
     through  the  intermediate  stage  of  looking  at  the                                                                    
     general standards.   Those are two  different ways that                                                                    
     could occur.                                                                                                               
MR.  MINTZ   pointed  out  that  subsection   (d)  includes  more                                                               
information as  to what costs  are allowable.  Referring  back to                                                               
AS 43.55.160(a),  he noted  that net value  is gross  value, less                                                               
two  types   of  deductions.     He  explained  that   the  lease                                                               
expenditures  have to  be  adjusted before  being  deducted.   "I                                                               
think the  concept here is very  simple," he said, "All  that the                                                               
producer should  be allowed to  deduct are  the net costs,  so if                                                               
there are  reimbursements, sales  of assets,  and so  forth, they                                                               
have to be subtracted from the gross costs."                                                                                    
REPRESENTATIVE   BERKOWITZ,  in   regard   to  the   transitional                                                               
investment expenditures, said 1/72 is an unusual fraction.                                                                      
MR.  DICKINSON explained  that  discussions  on the  transitional                                                               
investment expenditures  have resulted in a  six-year time frame.                                                               
However, since this is a  monthly expenditure, when multiplied by                                                               
12, the  end fraction  is 1/72.   This means  that a  company can                                                               
take  the transitional  investment expenditures  in the  first 72                                                               
months, when  the average  price is  higher than  $40.   He noted                                                               
that  this is  a  slightly  more complex  formula  that has  been                                                               
addressed  at length.   In  regard  to the  state allowing  lease                                                               
expenditures as a  deduction, he added that 100  percent of these                                                               
costs are allowed.  He said:                                                                                                    
     In other  words, we do not  try to parse out  a royalty                                                                    
     share.   Typically the royalty owner  doesn't reimburse                                                                    
     those, isn't part of that.   So we are allowing 8/8s of                                                                    
     the  upstream cost  to  be allowed.    Therefore, if  a                                                                    
     royalty owner,  for example, the  state, were  paying a                                                                    
     field  cost allowance  or reimbursing,  those will  now                                                                    
     become a  deduction.  Those will  now, if I can  make a                                                                    
     deduction, a contra-expense account,  if you will, that                                                                    
     will lower  the amount of  expenses that a  company can                                                                    
     deduct.   If they're  spending $100 for  upstream costs                                                                    
     and the Department of  Natural Resources is reimbursing                                                                    
     them 20 cents  under a lease, then  they're really only                                                                    
     spending 80 cents,  and that's all they're  going to be                                                                    
     allowed to deduct for purposes of the tax.                                                                                 
2:47:08 PM                                                                                                                    
MR.  MINTZ explained  that  transitional investment  expenditures                                                               
are  capital expenditures  incurred from  7/2001 to  6/2006, less                                                               
proceeds from  the sale of assets  acquired as a result  of those                                                               
capital  expenditures.   He  noted  that  AS 43.55.160(i)  is  an                                                               
exception to the basic calculation  of net value.  This exception                                                               
states that  if there  is net  value remaining  after all  of the                                                               
deductions, there is an allowance of  up to $73 million per year.                                                               
He  added  that because  this  is  a  monthly tax,  the  producer                                                               
receives a monthly allowance, which  can be allocated in any way.                                                               
There are three limits on this  allowance:  It may not exceed $73                                                               
million per year, it may not reduce  the net value of oil and gas                                                               
below zero, and if not used  within the year, the $73 million may                                                               
not be carried forward.                                                                                                         
REPRESENTATIVE SEATON opined  that the $73 million  could be used                                                               
all at one time if the company owed the full amount in taxes.                                                                   
MR.  MINTZ  said  that  this  is correct.    He  stated  that  AS                                                               
43.55.011(a)  applies a  20 percent  tax  rate to  the net  value                                                               
calculation.   He said  that before  the producer  determines the                                                               
monthly payment,  there is the  possibility of  applying credits.                                                               
He explained that  one of the major credits  the bill establishes                                                               
include  the  qualified  capital   expenditure  credit  which  is                                                               
defined in  AS 43.55.024(b).   He said that  capital expenditures                                                               
fall  under three  categories.   The first  category is  anything                                                               
required to be capitalized under  the Internal Revenue Code.  The                                                               
second is intangible drilling costs,  and the third is geological                                                               
and  geophysical exploration  costs.   He  added  that this  last                                                               
category is  not usually  considered a  capitol investment.   The                                                               
credit is limited to new assets.                                                                                                
CO-CHAIR  SAMUELS asked  if  there is  any  advantage to  pushing                                                               
money into the capital column instead of the operating column.                                                                  
MR. MINTZ  replied that, overall,  there is no incentive  for the                                                               
producer since it  is preferable to use an item  as an expense as                                                               
opposed to an expenditure for federal  income tax.  He noted that                                                               
this is why the bill tracks the IRS categorization.                                                                             
2:51:38 PM                                                                                                                    
MR.  DICKINSON  added that  it  will  be deductible  either  way;                                                               
however,  the federal  categorization will  have a  larger dollar                                                               
CO-CHAIR SAMUELS asked if, for  auditing purposes, the state will                                                               
have access to the companies' federal income tax information.                                                                   
MR. DICKINSON replied  that the state has  an information sharing                                                               
agreement with  the IRS,  adding that  the only  information that                                                               
would be  audited is  whether or not  the information  was given,                                                               
not whether or not the decision [made by the IRS] was correct.                                                                  
2:52:50 PM                                                                                                                    
REPRESENTATIVE SEATON asked,  "With the 20 percent  tax credit on                                                               
either operating or capital;...is there any gaming?                                                                             
MR.  DICKINSON  replied  that  for the  deduction  it  is  equal.                                                               
"Operating  gets  a  20  percent deduction;  capital  gets  a  20                                                               
percent deduction, so  there's no reason to game that."   He said                                                               
only the  capital gets the 20  percent credit in addition.   "And                                                               
so  we believe  that just  the categorization  of credit  or non-                                                               
credit, the lower  incremental tax rate in  the state, production                                                               
tax means that  you won't try to  do it here and  then suffer the                                                               
consequences of the federal tax."                                                                                               
2:53:39 PM                                                                                                                    
MR.  MINTZ stated  that  the second  credit can  be  found in  AS                                                               
43.55.160(b).   He explained  that a  producer with  excess lease                                                               
expenditures during a  calendar year, can carry  them forward and                                                               
use them  as credit.  He  said a 20 percent  credit is equivalent                                                               
to  carrying  forward  the  deduction,  as the  tax  rate  is  20                                                               
percent.   He  mentioned  an additional  credit  that allows  the                                                               
conservation  surcharges to  be credited  against the  production                                                               
tax, and commented that this is only at 2-3 cents per barrel.                                                                   
CO-CHAIR SAMUELS  asked if there  is a  limit on the  amount that                                                               
can be carried forward from year to year.                                                                                       
MR.  DICKINSON  said  yes,  and  added  that  there  are  credits                                                               
established in AS  43.55.025 that will remain  the same; however,                                                               
only one can be  used.  He also noted that  there is an education                                                               
credit that is also available.                                                                                                  
MR.  MINTZ,  referring to  page  21  of  the handout,  said  that                                                               
calculating tax begins with gross  value.  The main difference in                                                               
the new calculation is that the  entire value of oil and gas from                                                               
a producer  is added together.   The second step is  to calculate                                                               
the adjusted lease  expenditures.  He explained  how to calculate                                                               
transitional  investment   expenditures.    The  third   step  is                                                               
deducting the $73 million allowance.                                                                                            
MR. MINTZ referred to the anti splitting provision and said:                                                                    
     In order to qualify for  a deduction, a producer has to                                                                    
     be  qualified  by  the  Department   of  Revenue.    As                                                                    
     everyone here has recognized, the  incentive here is to                                                                    
     multiply the  number of producer entities  so that each                                                                    
     can qualify  for the  $73 million,  and that's  what we                                                                    
     need to protect against.   Now, the most obvious way to                                                                    
     do that, is probably not  that much of a problem, which                                                                    
     is to set up a  number of different producers which are                                                                    
     subsidiaries or in some way  related.  The reason I say                                                                    
     that's probably not  that much of a  problem is because                                                                    
     the department [regulations]  already have a definition                                                                    
     of  "producer,"  which  essentially  includes  entities                                                                    
     that are  ... affiliated  and would be  considered part                                                                    
     of  a   consolidated  entity   under  normal   tax  law                                                                    
2:59:15 PM                                                                                                                    
CO-CHAIR SAMUELS asked  if two companies merged and  had the same                                                               
board  of  directors  but different  presidents,  would  they  be                                                               
considered affiliated companies?                                                                                                
MR. DICKINSON said that this is correct.                                                                                        
CO-CHAIR SAMUELS asked what percentage  of the board of directors                                                               
would need to be the same.                                                                                                      
MR. DICKINSON replied that he  would look up this information and                                                               
opined that this is the substantial control standard.                                                                           
REPRESENTATIVE  SEATON  asked  if  the 72-month  period  is  only                                                               
applicable to transitional investment expenditures.                                                                             
MR.  DICKINSON said  that this  is  correct, adding  that if  the                                                               
price dropped  for one month,  this month  would be added  to the                                                               
end of the queue and show up six years and one month later.                                                                     
3:01:11 PM                                                                                                                    
MR.  MINTZ  stated  that  the definition  of  "producer"  in  the                                                               
current  regulation says  that owner  includes all  members of  a                                                               
group  in  which one  exercises  significant  influence over  the                                                               
others  within  the  meaning   of  accounting  principles  aboard                                                               
opinion number  18.  He opined  that this is limited  only by the                                                               
creativity  and imagination  of those  attempting to  receive the                                                               
benefit of  the allowance.  For  this reason, he noted,  the bill                                                               
attempts to  use the  most basic language,  adding that  the more                                                               
specific the  language, the easier  it would be for  companies to                                                               
"get around" this, if the specific  terms are not met.  He quoted                                                               
from  Page 16,  Subsection (j)  of HB  488, which  reads in  part                                                               
[original punctuation provided]:                                                                                                
     To  qualify  under  this subsection,  a  producer  must                                                                    
     demonstrate  that its  operation  in the  state or  its                                                                    
     ownership of an interest in  a lease or property in the                                                                    
     state as  a distinct  producer entity would  not result                                                                    
     in  the division  among multiple  producer entities  of                                                                    
     any net value of taxable oil  and gas ... that would be                                                                    
     reasonably  expected  to  be  attributed  to  a  single                                                                    
     producer entity  if the allowance  provision of  (i) of                                                                    
     this section did not exist.                                                                                                
MR. MINTZ  reiterated that  existing as a  producer in  the state                                                               
triggers  the  $73  million  allowance,   and  the  danger  is  a                                                               
multiplication of producers.  He said:                                                                                          
     To rephrase  the standard, if  a single  producer would                                                                    
     do the job  without the $73 million  allowance, then we                                                                    
     have  to  be  suspicious  if  there  are  two  or  more                                                                    
     producers that just  show up.  It's a  very tricky area                                                                    
     because we don't want to say  that it's not going to be                                                                    
     ...  allowed to  a  producer that  wouldn't  be in  the                                                                    
     state  or wouldn't  be operating  were it  not for  the                                                                    
     allowance,  because you  want that  to happen.   That's                                                                    
     the incentive that you're trying  to provide.  What you                                                                    
     don't want to  happen is for there to  be an artificial                                                                    
     multiplicity of entities.                                                                                                  
3:04:01 PM                                                                                                                    
CO-CHAIR SAMUELS said:                                                                                                          
     The other  fear is  all these corporations  do business                                                                    
     around the  globe, and  if it  behooves you,  I'll give                                                                    
     you  half  of  my  small  field here.    And  we'll  do                                                                    
     something for  you in Kuwait,  or Angola,  or Venezuela                                                                    
     ... and  everybody wins if  both companies get  the $73                                                                    
     million tax  deduction ...  and then  you could  get it                                                                    
     back somewhere  else in the  world, and ...  there's no                                                                    
     way you can audit for that.                                                                                                
MR. DICKINSON expressed  hope that there would be a  way to audit                                                               
this.   He pointed out  that the  bill says "Any  information the                                                               
department may  require," which means  that if the  department is                                                               
auditing  for this,  it would  be appropriate  for it  to request                                                               
access  to the  books and  records showing  how this  was brought                                                               
REPRESENTATIVE  BERKOWITZ  said   the  benefit  between  multiple                                                               
producers should be incorporated  in the department's assessment.                                                               
He  inquired   as  to   the  standard   used  for   the  producer                                                               
demonstration  and if  there is  a penalty  for violation  of the                                                               
splitting provision.                                                                                                            
MR. MINTZ replied that the  producer would have to demonstrate to                                                               
the Department of Revenue, which  must then determine whether the                                                               
producers qualify.                                                                                                              
MR.  DICKINSON  said  there  is  no  penalty  for  violating  the                                                               
splitting provision.  He opined that  a company would come to the                                                               
department beforehand in  an attempt to qualify.   The department                                                               
would then  examine the application,  choosing whether or  not to                                                               
grant the qualification.  The idea  is to remain prospective.  He                                                               
said that  while there  is no penalty  for trying,  this probably                                                               
would not occur.                                                                                                                
REPRESENTATIVE  BERKOWITZ  remarked  that if  the  department  is                                                               
concerned  that  splitting could  happen,  there  needs to  be  a                                                               
sanction.   He expressed  concern with  the possible  exchange of                                                               
benefits in addition to the division of ownership.                                                                              
MR.  MINTZ  said  that  this  needs to  be  given  more  thought;                                                               
however,  the term  "ownership" is  used because  it is  only the                                                               
status  of  producer  that  triggers   the  eligibility  for  the                                                               
allowance.   He noted  that it  does not matter  if a  benefit is                                                               
received from another  producer, if they do not  also receive the                                                               
eligibility for the allowance.                                                                                                  
3:08:09 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG referred  to hearings  on de-aggregation                                                               
and a  discussion on letters  of opinion which were  not answered                                                               
in a  timely fashion.   He asked about  the speed of  response to                                                               
inquiries without a good track record.                                                                                          
MR.  DICKINSON replied  that the  letters in  question were  sent                                                               
after production had  begun.  He opined that  if individuals were                                                               
concerned,  they would  make application  prior to  stepping into                                                               
the state.   If the department felt that the  decision of whether                                                               
or not to  come into the state was dependant  on the department's                                                               
decision, the commissioner would respond as soon as possible.                                                                   
REPRESENTATIVE  SEATON   asked  if   a  company  new   to  Alaska                                                               
interested  in  purchasing  10   percent  of  Prudhoe  Bay  would                                                               
MR. DICKINSON stated  that this brings up the issue  of drawing a                                                               
line between  economical development on  the North Slope  and tax                                                               
motivated development,  which the state is  trying to discourage.                                                               
He said  that many  interests in Prudhoe  Bay have  changed hands                                                               
over the  years, and this was  not tax motivated.   He added that                                                               
if a producer  wanted to buy out an existing  interest, the state                                                               
would  look  at the  new  producer  and if  it  was  a matter  of                                                               
replacing one producer with another,  the new producer would most                                                               
likely  qualify.   He  explained  that  the definition  is  broad                                                               
enough  to  enable the  commissioner  to  examine the  facts  and                                                               
REPRESENTATIVE SEATON  commented that the state  is worried about                                                               
tying  into a  long-term  fix.   He  asked if  there  would be  a                                                               
downside  to applying  a  ten-year sunset  provision  to the  $73                                                               
million provision.                                                                                                              
3:11:56 PM                                                                                                                    
MR.  DICKINSON   replied  that  if   the  there  is   abuse,  the                                                               
legislature has  the ability to  step in and  fix this.   If some                                                               
portions  were  tied  to  a  contract  with  elements  of  fiscal                                                               
certainty, additional  anti-splitting provisions can be  added to                                                               
the contract.   For  example, if  producers with  major interests                                                               
were signing the  contract, an additional provision  can be added                                                               
which would  require the issue to  go to an arbitrator  to decide                                                               
if  the behavior  was  tax motivated.   He  noted  that when  the                                                               
legislature  relinquishes  the right  to  "fix"  an abuse,  other                                                               
tools must be available.                                                                                                        
3:12:58 PM                                                                                                                    
REPRESENTATIVE SEATON asked  if Mr. Dickinson was  stating that a                                                               
sunset would not work for this purpose.                                                                                         
MR. DICKINSON  replied that while  several of the amounts  in the                                                               
bill are  tied to inflation, [the  $73 million] is not.   He said                                                               
that  this will  become  a smaller  incentive,  although it  will                                                               
still  remain  a  significant  amount.     The  benefits  of  the                                                               
allowance should continue  to attract new producers  to the North                                                               
Slope and Cook Inlet.  He  stated that removal or adding a sunset                                                               
provision was not seriously considered.                                                                                         
3:14:13 PM                                                                                                                    
CO-CHAIR  SAMUELS  asked  how much  power  the  DNR  commissioner                                                               
currently has in regard to the sale  of a portion of a field.  He                                                               
asked  how  much  confidential sale  information  the  state  has                                                               
access to and  inquired as to whether  the commissioner currently                                                               
has the power to stop a sale.                                                                                                   
MR. MINTZ replied that while he  does not have a complete answer,                                                               
the lease  assignments require the approval  of the commissioner.                                                               
However, the  lease assignments are  broad enough to  perform the                                                               
reclamation that is required after  the lease has terminated.  He                                                               
stated that he is not sure what financial details can be known.                                                                 
MR.  DICKINSON added  that  the  department receives  information                                                               
about  sales  because  of  appraisals   of  comparable  sale  for                                                               
property tax.                                                                                                                   
3:16:26 PM                                                                                                                    
REPRESENTATIVE JOULE  asked how  long the  allowance would  be in                                                               
MR. DICKINSON said every year.                                                                                                  
REPRESENTATIVE JOULE asked  if it would be possible  to slow down                                                               
development  and  calculate the  barrels  so  that the  allowance                                                               
would be  received each  year.   He asked if  there would  be any                                                               
reason to calculate every year.                                                                                                 
MR.  DICKINSON  opined that  there  may  be  reason to  do  this;                                                               
however,  anyone attempting  to  time the  profits  would need  a                                                               
crystal ball  to know future prices.   He added that  in general,                                                               
the  only  changes that  could  be  made  at the  margin  include                                                               
delaying  sales if  the producer  felt  prices were  rising.   He                                                               
opined that  a person  may make  an attempt to  do this  based on                                                               
future estimates of price, which could possibly go awry.                                                                        
3:18:25 PM                                                                                                                    
CO-CHAIR SAMUELS  commented that  in 15  years, $73  million will                                                               
only be  worth one third of  what it is  today and may not  be as                                                               
much  of  a   concern.    However,  there  is  still   a  lot  of                                                               
REPRESENTATIVE ROKEBERG,  in regard  to the inflation  clause for                                                               
the $40 barrel, asked why the index was not specified now.                                                                      
MR. MINTZ  replied that there  are a number of  different indices                                                               
and  the  department  needs  a  chance to  study  the  issue  and                                                               
determine the most appropriate formula.                                                                                         
REPRESENTATIVE ROKEBERG remarked that it  would be logical to use                                                               
the U.S. All Cities Index.                                                                                                      
MR. DICKINSON  replied that this  could have been  used, however,                                                               
in  time, this  may change.   He  stated that  the statute  gives                                                               
broad  authority   and  the   specifics  are   left  up   to  the                                                               
REPRESENTATIVE ROKEBERG asked if subsection  (l) is the "bail out                                                               
MR.   MINTZ  replied   that  this   section  is   confirming  the                                                               
department's  general authority  and  added that  if the  statute                                                               
specifies  an   index,  this  could   not  be   adjusted  through                                                               
regulations.  He opined that there is no correct answer.                                                                        
MR. DICKINSON  pointed out that current  regulations consider the                                                               
oil price  to be  the average of  the Reuters  Reporting Service,                                                               
the Telerate  Reporting Service, and  Platts.  He  explained that                                                               
up until  three years ago, spot  price was defined as  the Platts                                                               
value.   He said that these  things change over time,  as long as                                                               
the broad statutory authority is in place.                                                                                      
REPRESENTATIVE BERKOWITZ asked  why the $40 was  increasing by an                                                               
inflation  rate which  is determined  by regulation,  rather than                                                               
allowing the amount  to be determined by regulation  on a regular                                                               
MR.  MINTZ replied  that  the  $40 trigger  applies  to the  1/72                                                               
transitional investment expenditure deduction  and does not apply                                                               
to the $73 million allowance.                                                                                                   
REPRESENTATIVE BERKOWITZ asked  if this only applies  to the claw                                                               
CO-CHAIR SAMUELS  said the  claw back does  not come  into effect                                                               
unless the price is over $40  per barrel and only with inflation.                                                               
He stated  that if three  years are  missed at under  $40 barrel,                                                               
with the  claw back, the missed  years can be added  to the "back                                                               
end" to collect when the price is above $40 per barrel.                                                                         
3:23:26 PM                                                                                                                    
MR.  MINTZ went  through the  chart on  page 25  of the  handout,                                                               
describing the calculation  of net value.  He  explained that the                                                               
calculation begins  with the  gross value  of oil  and gas.   The                                                               
next step is  to subtract the adjusted  lease expenditures, which                                                               
must not  exceed the  gross value.   He  went on  to say  that if                                                               
there  is  a  positive  remainder,  the  transitional  investment                                                               
expenditures can be  deducted.  If a positive  net value remains,                                                               
the  monthly  allocation of  the  $73  million allowance  can  be                                                               
deducted.   He noted that none  of these deductions may  go below                                                               
zero.   Mr.  Mintz pointed  out that  AS 43.55.160(f)  allows the                                                               
producer to deduct 1/12 of  the annual lease expenditures, rather                                                               
than deducting  the monthly lease  expenditures.  This is  a safe                                                               
harbor and allows "lumpy" costs to be spread over 12 months.                                                                    
MR.  DICKINSON, in  response to  a  question from  Representative                                                               
Seaton,  said the  relationship  between gas  and  oil prices  is                                                               
"fairly tight,"  and in  general only  one standard  is set.   In                                                               
response  to further  questions, he  stated his  belief that  the                                                               
relationship is close, adding that  in Cook Inlet, prior to world                                                               
pricing, the relationship  was not close, as  the BTU equivalency                                                               
was around 6-1.                                                                                                                 
3:26:38 PM                                                                                                                    
MR. MINTZ  noted that the  current regulation  defines "producer"                                                               
as a  working interest owner  or lessee.   He stated that  one of                                                               
the goals of  HB 488 is to allow exploration  expenses to qualify                                                               
for  loss  and  capital  expenditure   credits.    He  said  that                                                               
exploration  is often  not conducted  on a  lease, but  rather is                                                               
conducted by permit  on land that is owned by  the state or other                                                               
land which the  permittee has no interest in.   He explained that                                                               
in subsection (m), it states  that for purposes of these credits,                                                               
an explorer is considered a producer.                                                                                           
REPRESENTATIVE ROKEBERG,  referring to Page 17,  Section 2, asked                                                               
why "target  zones" only apply to  land located in the  state and                                                               
does  not include  federal  lands  off shore.    He requested  an                                                               
update of the status of the state's share of federal lands.                                                                     
MR. MINTZ  said the production  tax applies to  Alaska regardless                                                               
of whether  the land  is federal,  state, or  private.   He noted                                                               
that there  is a  tax exemption  for oil  and gas  royalty shares                                                               
which are  owned by the state  or federal government.   He stated                                                               
that the  outer continental shelf  (OCS) is outside the  State of                                                               
Alaska; therefore,  the state's taxing authority  does not apply.                                                               
He added  that because the  production tax applies  to production                                                               
from leases  or properties  within the state,  it is  good public                                                               
policy  to  allow  credits and  deductions  for  exploration  and                                                               
production of  oil and gas  within the state.   In the case  of a                                                               
stratigraphic well,  which is typically  drilled for  the purpose                                                               
of obtaining  geological information,  he explained that  this is                                                               
defined based on target zones.                                                                                                  
REPRESENTATIVE ROKEBERG asked if  the state receives benefits for                                                               
OCS  and Minerals  Management Services  (MMS)  leases beyond  the                                                               
three-mile zone.                                                                                                                
MR. MINTZ replied that there  is revenue sharing from the federal                                                               
government, although  the state  does not  tax the  production or                                                               
property used  in the production  and does not  receive royalties                                                               
from the production.                                                                                                            
REPRESENTATIVE  ROKEBERG asked  if  the  state receives  benefits                                                               
from  National   Petroleum  Reserve-Alaska  (NPR-A)   and  Arctic                                                               
National Wildlife Refuge (ANWR).                                                                                                
3:31:51 PM                                                                                                                    
MR. MINTZ  replied that  the state taxes  NPR-A, and  the federal                                                               
government shares royalties.                                                                                                    
MR.  DICKINSON,  in  response to  questions  from  Representative                                                               
Rokeberg, added that  the state would apply a tax  of 8/8 instead                                                               
of 7/8.   He explained  that this means if  it is a  state lease,                                                               
the state  is not taxed.   If the land is  privately owned, there                                                               
is no state exemption; therefore the  producer pays tax on 8/8 of                                                               
the production.                                                                                                                 
CO-CHAIR  SAMUELS,  referring  to  Page 17,  Line  7,  asked  for                                                               
confirmation that "only if the  wells target zones are located in                                                               
the  state" means  the  political boundaries  of  the state,  not                                                               
state owned land.                                                                                                               
MR. DICKINSON confirmed that this is correct.                                                                                   
MR.  MINTZ, in  regard to  transferable tax  credit certificates,                                                               
explained that  if any  tax credits are  unused and  the producer                                                               
wishes  to  transfer the  credits  to  a different  company,  the                                                               
producer  must  apply   to  the  department  for   a  tax  credit                                                               
certificate.  He said that to  maximize the economic value of the                                                               
certificate to the applicant, it is  necessary to act in a timely                                                               
manner; therefore,  there is an expedited  process which requires                                                               
the department to make a decision  within 60 days.  He noted that                                                               
information  may come  up later  that casts  doubt regarding  the                                                               
eligibility  for  the  credit.   If  the  marketability  for  the                                                               
certificate  is   impaired,  this   undermines  the   purpose  of                                                               
providing  the incentive  to the  original explorer  or producer.                                                               
He said that  once the certificate is issued, the  buyer can rely                                                               
on it.  If a problem comes up,  and there is a deficiency for the                                                               
original credit  on the  part of the  producer that  incurred the                                                               
cost,  the  department  retains  the  ability  to  assess  a  tax                                                               
deficiency from the original producer.                                                                                          
MR. MINTZ went on to explain  the process of calculating the tax.                                                               
He stated  that this begins  with the net  value of oil  and gas,                                                               
followed by  the application  of a  20 percent  rate to  find the                                                               
amount of tax before the credit.   The producer can then subtract                                                               
the desired amount  of its credit, not to exceed  zero.  He noted                                                               
that  on  any given  month,  not  more  than  20 percent  of  the                                                               
remaining  tax  liability may  be  subtracted  by credit  from  a                                                               
certificate.  The remainder is the tax payable for the month.                                                                   
REPRESENTATIVE SEATON  asked if  this is  set up  subsequently so                                                               
the producer cannot take the purchase credits first.                                                                            
MR. MINTZ replied that the  timing is not specified; however, the                                                               
current language  is sufficient,  as it does  state that  the tax                                                               
cannot be  reduced below  80 percent of  the full  amount without                                                               
taking  the credit.   He  went on  to say  that if  the purchased                                                               
credit was applied  first, this would result in  taking more than                                                               
20 percent of the full tax.                                                                                                     
3:36:33 PM                                                                                                                    
CO-CHAIR SAMUELS asked how the  overhead is allocated and how the                                                               
costs given by the industry are audited.                                                                                        
MR.  MINTZ,   in  regard   to  the   overhead,  stated   that  AS                                                               
43.55.160(d)  gives the  department  the ability  to determine  a                                                               
reasonable allowance for overhead.                                                                                              
MR.  DICKINSON noted  that there  are several  pages in  the bill                                                               
dedicated  to the  costs.   He stated  that currently,  the state                                                               
believes that  the major  units on the  North Slope  have several                                                               
joint  owners and  spend  time  and effort  checking  in on  each                                                               
other.  The state has the ability  to check in and make sure that                                                               
costs are not  migrating and are lined up with  the agreements as                                                               
they existed prior to HB 488  becoming effective.  He opined that                                                               
Kuparuk River  Unit and Prudhoe  Bay cover  a fair amount  of the                                                               
costs.   He  stated  that  this is  an  area  which needs  strong                                                               
regulations,  and  the  state  intends  to  contact  firms  which                                                               
specialize in joint venture audits to  help with this.  He agreed                                                               
that this  is an area  where there  may be erosion  of forecasted                                                               
revenues if  the cost is  different than that which  the forecast                                                               
was based on.                                                                                                                   
3:41:19 PM                                                                                                                    
MR. MINTZ,  turning to the  final page, explained the  payment of                                                               
the  production  tax.     He  stated  that   under  current  law,                                                               
production tax for  one month is due at the  end of the following                                                               
month.  He  said that this is retained; however,  under the bill,                                                               
90 percent of  the tax is due  at the end of each  month, and the                                                               
remainder is due at  the end of March in the  following year.  He                                                               
said that the reason for this  is to deal with issues that cannot                                                               
be  resolved  until   the  year  is  over.     These  issues  are                                                               
coordinated with  income tax.   He remarked  that this is  a safe                                                               
harbor,  adding that  if the  producers'  estimate is  incorrect,                                                               
there would be interest on the any amount that was not paid.                                                                    
MR.  DICKINSON added  that if  the  producer pays  too much,  the                                                               
state  does not  owe  interest until  the  producer requests  the                                                               
refund check.  The state then has 90 days to issue the check.                                                                   
REPRESENTATIVE   SEATON  asked   how  many   producers  currently                                                               
MR. DICKINSON  replied that  the state  income tax  includes four                                                               
estimated payments.   He said that  at the end of  the year, when                                                               
the  tax  return is  filed,  any  overpay  or underpay  would  be                                                               
discovered.  If underpaid, then interest would be owed.                                                                         
REPRESENTATIVE   SEATON  asked   if   a  penalty   is  owed   for                                                               
MR. DICKINSON  replied that this  is correct, and said  there are                                                               
penalties in place for willful neglect.                                                                                         
REPRESENTATIVE SEATON remarked that  this is a significant amount                                                               
of the  budget, and  opined that  if the state  is allowing  a 10                                                               
percent hold  back throughout  the year, it  would make  sense to                                                               
calculate interest on  the underpayment.  He  said "We're talking                                                               
about significant  revenue here, when  we're trying to  invest in                                                               
[Public  Employees'  Retirement  System  (PERS)]  and  [Teachers'                                                               
Retirement System (TRS)] and ...  Permanent Fund, and we could be                                                               
talking about amounts  that are ... fairly large."   He requested                                                               
a report from the department as to the effect of this.                                                                          
MR. DICKINSON said that they would do this.                                                                                     
CO-CHAIR SAMUELS  said "So, in  January we're going to  write off                                                               
everyone's $73  million and  in March  we're going  to get  a big                                                               
3:45:43 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ  asked  who  the  claw  back  provision                                                               
affects and by how much.                                                                                                        
MR. DICKINSON said anyone who made investments; he continued:                                                                   
     Roughly  speaking,  I think  you  could  tell that  the                                                                    
     major  Prudhoe  Bay  owners ...  if  you  remember  the                                                                    
     slides  that [Mr.  Marks] pointed  out ...  if you  ...                                                                    
     think about  $1 per  barrel for basic  baseline capital                                                                    
     costs in  Prudhoe Bay for  the baseline  production ...                                                                    
     that would be  about $300-$400 million a  year total on                                                                    
     the baseline production, and about  half of that ... is                                                                    
     ... from Prudhoe Bay itself.                                                                                               
REPRESENTATIVE  BERKOWITZ  asked what  this  means  to the  state                                                               
MR.  DICKINSON replied  that  if the  estimates  are correct,  it                                                               
would be about $170 million per year for six years.                                                                             
REPRESENTATIVE  BERKOWITZ voiced  his concern  with retrospective                                                               
application  of law  and asked  if this  would affect  past taxes                                                               
collected by the state and federal government.                                                                                  
MR.  DICKINSON  replied   that  it  will  not   affect  past  tax                                                               
collection, but will affect collections  made during the first 72                                                               
months in which the prices are above the benchmark.                                                                             
3:48:38 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ  noted that  the effective date  for the                                                               
tax  is  July 1,  and  asked  how far  into  the  past this  date                                                               
potentially could have gone.                                                                                                    
MR.  MINTZ  replied  that  he  is  unaware  of  any  attempts  to                                                               
retroactively change a tax law  by multiple years, but noted that                                                               
short retroactivity periods have been upheld by the courts.                                                                     
REPRESENTATIVE BERKOWITZ said:                                                                                                  
     So, it  would seem  to me that  if we're  accepting the                                                                    
     premise that  we can retroactively  give a  tax benefit                                                                    
     for investments that  have been made for  the past five                                                                    
     years,  we  could, theoretically,  retroactively  apply                                                                    
     the PPT for a portion of that time as well ....                                                                            
MR. MINTZ replied that in general  this is correct.  He said that                                                               
this  is different  from giving  affect to  a past  investment or                                                               
transaction  in  terms  of  its  affect  on  future  taxes.    He                                                               
explained  that this  is different  from changing  the taxpayers'                                                               
liability during previous tax periods.                                                                                          
REPRESENTATIVE BERKOWITZ commented that  the state could make the                                                               
PPT effective in 2003, but allow time to make up the payments.                                                                  
MR.  MINTZ said  he did  not know  how far  back the  retroactive                                                               
changes would be upheld.                                                                                                        
REPRESENTATIVE BERKOWITZ commented that  January of 2006 would be                                                               
MR. MINTZ agreed that this would most likely be upheld.                                                                         
REPRESENTATIVE BERKOWITZ asked  if January of 2005  would be more                                                               
MR. MINTZ stated that this is his impression.                                                                                   
CO-CHAIR  SAMUELS asked  if there  is any  way for  the state  to                                                               
differentiate  between the  producers who  take general,  ongoing                                                               
capital expenditures  and recoup costs quickly  and the producers                                                               
who use  a ten-year  look-forward and recoup  their costs  over a                                                               
long period of time.                                                                                                            
3:53:05 PM                                                                                                                    
MR. DICKINSON replied  that most fall under  the second category.                                                               
He said that in all  companies, every capital upgrade and capital                                                               
maintenance is calculated  to find out whether  the investment is                                                               
worthwhile.   He said  there is  a concept  known as  "license to                                                               
operate" which is  generally things such as health  and safety or                                                               
environmental issues, where the return is intangible.                                                                           
REPRESENTATIVE  ROKEBERG, referring  to retrospective  changes to                                                               
the tax  laws, commented  that in the  past, the  legislature has                                                               
made retroactive changes  to tax laws in order  to conform public                                                               
policies.   He opined that there  needs to be a  compelling state                                                               
interest  in order  to make  the changes  retroactive, and  added                                                               
that  the  collection of  revenue  alone  is not  an  appropriate                                                               
reason  to do  this.   He asked  if, during  the drafting  of the                                                               
legislation,   the  department   looked  into   the  history   of                                                               
retrospectivity and  if the department  would be able  to provide                                                               
the  committee members  information on  the constitutionality  of                                                               
this practice.                                                                                                                  
MR. MINTZ replied  that the cases he researched  used due process                                                               
to evaluate retroactivity and the  tax content, and only required                                                               
a general  government interest  in the  retroactivity.   He added                                                               
that he would look into this further.                                                                                           
3:56:44 PM                                                                                                                    
REPRESENTATIVE SEATON  asked if  anything in the  bill eliminates                                                               
the  depreciation  ability  for   capital  projects  from  state,                                                               
corporate or federal tax.                                                                                                       
MR. DICKINSON said that this is correct.                                                                                        
REPRESENTATIVE SEATON  asked if the bill  would eliminate credits                                                               
that exist under the current tax system.                                                                                        
MR. DICKINSON said no.                                                                                                          
REPRESENTATIVE SEATON  asked if the  purpose of the claw  back is                                                               
provide  an  incentive  to  companies  that  invested  for  other                                                               
3:58:18 PM                                                                                                                    
MR.  DICKINSON replied  that  the  state is  going  to be  taxing                                                               
profitability, and  opined that the producer  should be comforted                                                               
with the  knowledge that if  they are  not making a  profit, they                                                               
will not be taxed.                                                                                                              
REPRESENTATIVE SEATON remarked  that the claw back  is credit for                                                               
old investment,  and the  purpose of the  credit is  to stimulate                                                               
new investment.   He expressed trouble understanding  why this is                                                               
being discussed.                                                                                                                
MR. DICKINSON replied  that this is not giving  a credit, instead                                                               
this allows companies  to include investments made  over the past                                                               
five  years  which  are  continuing  to  pay  off,  in  order  to                                                               
determine profitability over the next six years.                                                                                
REPRESENTATIVE  SEATON referred  to the  separation of  satellite                                                               
fields, and he requested information  on tax amounts for 2004 and                                                               
2005  and how  much would  have  been paid  to the  state if  the                                                               
aggregation had been made at the time.                                                                                          
4:00:53 PM                                                                                                                    
REPRESENTATIVE  LEDOUX  asked  if   the  claw  back  would  allow                                                               
companies  to deduct  from  the current  profitability  or if  it                                                               
would allow the producers to amend past income tax amounts.                                                                     
MR. DICKINSON replied that the claw  back would have no affect on                                                               
income tax and would only apply  to production tax.  He explained                                                               
that it would  allow them to deduct investments  from prior years                                                               
which  continue  to  produce income  from  their  calculation  of                                                               
profitability in  the first six years  the tax exists.   He noted                                                               
that it would  be longer than six years if  the price drops below                                                               
$40 per barrel.  He stated  that there would not be a retroactive                                                               
amendment on  prior returns.   He said  that taking  the purchase                                                               
price of assets into account  when calculating profitability will                                                               
lower state revenues by around $170 million per year.                                                                           
REPRESENTATIVE  LEDOUX asked  why  the discussion  turned to  the                                                               
constitutionality of retroactivity clauses.                                                                                     
MR.  MINTZ  replied that  this  was  a  result of  other  members                                                               
questioning other possibilities.                                                                                                
REPRESENTATIVE  ROKEBERG  requested  a list  of  current  credits                                                               
provided  for oil  and  gas production.    He questioned  whether                                                               
these should  be repealed  and, if  not, how  they fit  into this                                                               
4:03:14 PM                                                                                                                    
MR.  DICKINSON  replied  that  there are  three  that  have  been                                                               
identified.  He said they are  the 025 within the production tax,                                                               
an  educational  credit,  040  credit  in  the  income  tax,  and                                                               
additional federal credits that are imported.                                                                                   
4:04:52 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  asked  how  these will  be  treated  in                                                               
relation to this bill.                                                                                                          
MR. DICKINSON  replied that those  related to the income  tax can                                                               
not be  changed, the  025 taxes  will be left  in place  and will                                                               
sunset.    There  will be  an  option  to  take  one of  the  two                                                               
programs.  Companies will not be able to take both.                                                                             
REPRESENTATIVE ROKEBERG asked  where the claw back  fits into the                                                               
MR. MINTZ  replied that this  is part of the  way to get  the net                                                               
MR.  DICKINSON said  that this  is call  "Transitional Investment                                                               
MR. MINTZ  said that  the credits  only apply  after the  tax has                                                               
been calculated and are then applied to the tax itself.                                                                         
REPRESENTATIVE  BERKOWITZ  remarked  that   he  does  not  recall                                                               
hearing any discussion  of a claw back until  the introduction of                                                               
HB 488.  He asked what inspired this term.                                                                                      
4:06:40 PM                                                                                                                    
MR. DICKINSON replied  that the department has  always focused on                                                               
transitional provisions.                                                                                                        
REPRESENTATIVE BERKOWITZ asked if other jurisdictions that have                                                                 
made changes to oil and gas fiscal system have had comparable                                                                   
provisions and requested to see this information.                                                                               
MR. DICKINSON replied that he did not have this information but                                                                 
would research this.                                                                                                            
[HB 488 was held over]                                                                                                          

Document Name Date/Time Subjects