Legislature(2005 - 2006)CAPITOL 124

03/02/2006 12:00 PM RESOURCES


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12:06:19 PM Start
12:06:26 PM HB488
04:17:06 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued from 3/1/06 --
-- Time Change --
-- Location Change --
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
Pacific Star Energy Group, Administration
Presentation on sectional analysis
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
                                                                                                                                
12:06:26 PM                                                                                                                   
                                                                                                                                
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."                                                                    
                                                                                                                                
12:06:41 PM                                                                                                                   
                                                                                                                                
KEN  THOMPSON, Managing  Director, Alaska  Venture Capital  Group                                                               
(AVCG),  relayed  that his  organization  is  an independent  oil                                                               
exploration company  with a focus  on the North  Slope.  It  is a                                                               
consortium of  15 independent  oil and gas  companies, and  he is                                                               
the  principal Alaska  owner and  investor.   He said  most owner                                                               
companies are  second and third  generation oil  patch companies.                                                               
He has  a subsidiary company  with technical staff  in Anchorage,                                                               
he noted.   That office was just opened last  month, and has been                                                               
active  in the  past six  North Slope  area-wide lease  sales, he                                                               
said, and has  acquired 600,000 acres of exploration  leases.  He                                                               
said  the strategy  is to  explore fields  in the  25-100 million                                                               
barrel  range,  fields  too  small   for  large  producers.    He                                                               
suggested that there are hundreds  of millions-if not billions-of                                                               
barrels of oil left in fields of that size.                                                                                     
                                                                                                                                
MR.  THOMPSON  reported  that AVCG's  first  well  started  being                                                               
drilled  last night  in partnership  with ConocoPhillips  Alaska,                                                               
Inc.  and Pioneer  Natural Resources  in  the Kronos  exploration                                                               
well.  He said Pioneer is the  operator, and the prospect is a 50                                                               
to 100  million barrel field.   "Or it could  be a dry  hole," he                                                               
said, but he will know in three  weeks.  He said AVCG is planning                                                               
two wells the following winter.                                                                                                 
                                                                                                                                
MR. THOMPSON said  he is the past president of  ARCO Alaska Inc.,                                                               
and  he  served  as  the  head  of  ARCO's  global  oil  and  gas                                                               
exploration programs  covering 20  countries.   He added  that he                                                               
has exploration  and production experience  in over  20 different                                                               
fiscal  regimes.   He said  the  proposed profit-based  petroleum                                                               
production tax (PPT) is the right step for Alaska.                                                                              
                                                                                                                                
MR. THOMPSON  said that  in 1994  he had  a briefing  on Alaska's                                                               
severance tax and  the complicated policy of  ELF (economic limit                                                               
factor).  He said he was told  then that the state was looking at                                                               
severance  tax  changes,  which provided  uncertainty  in  ARCO's                                                               
forecasts.   He said the company  ran a range of  economics based                                                               
on that uncertainty.  ELF has  been the topic of controversy, and                                                               
he often heard  of the imminent threat of change,  and it is time                                                               
to  put  the  new  system  in  place.   He  said  in  most  other                                                               
countries,  the system  is either  profit-sharing or  production-                                                               
sharing, and  that's much more  progressive because  a government                                                               
shares in  the upside  when the prices  are high  and "government                                                               
also shares in the  pain at lower oil prices."   He said that can                                                               
help smaller companies like AVCG.                                                                                               
                                                                                                                                
12:12:25 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON characterized the 20 percent  tax rate as fair.  The                                                               
state owns the land  and the oil, "we simply lease  it, and we do                                                               
have implied covenants to be fair  with the state."  He mentioned                                                               
that he would be addressing the  value of the PPT to industry and                                                               
what should or should not be changed in HB 488.                                                                                 
                                                                                                                                
CO-CHAIR RAMRAS  relayed that one of  his articulate constituents                                                               
gave the point of view that ELF is much simpler than a PPT.                                                                     
                                                                                                                                
12:14:21 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON noted that when he first  saw it he viewed it as the                                                               
most complicated  tax system he had  ever seen.  He  said ELF can                                                               
become  controversial for  well  rates, although  the intent  was                                                               
fair, which was to foster development  of fields that may be more                                                               
marginal.  He said Alaska's  history was the prolific Prudhoe Bay                                                               
field, but other well rates were  not as prolific, so it was fair                                                               
to try to come up with  a system that would allow for development                                                               
of more  marginal fields.   It is  interesting that at  very high                                                               
oil  prices  very few  things  are  marginal anymore,  he  noted.                                                               
Technology has greatly  improved well rates, "so it  is time that                                                               
the  state look  at something  different."   He said  the PPT  is                                                               
complex,  but  most companies  are  familiar  with that  kind  of                                                               
system.   It  will mean  more effort  for the  state and  for the                                                               
producers on auditing and control  of expenses, because those are                                                               
deducted from  the revenues.  The  PPT is complex but  so was the                                                               
ELF, he opined.                                                                                                                 
                                                                                                                                
12:16:34 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON  suggested that some  people might lose site  of the                                                               
fact  that the  PPT is  merely tweaking  one element  of the  oil                                                               
revenue system-the severance or production  tax.  He said it only                                                               
provides  25 percent  of Alaska's  oil  revenue.   Last year  oil                                                               
revenue  was about  $860 million,  and in  fiscal year  2005, the                                                               
state  received $2.5  billion  through  the following:  royalties                                                               
that  are 12.5  to  16.66  percent of  revenue;  property tax  ad                                                               
valorem; lease  bonuses; and  corporate petroleum  tax.   None of                                                               
which  is being  changed.   "By the  way, all  those systems  are                                                               
based  on revenues,  and  of  course a  property  tax on  capital                                                               
investment level," he  stated.  It is wise for  the state to have                                                               
a  mixed  portfolio  just  like  a person  would  have  an  asset                                                               
allocation  in different  elements, whether  it is  stocks, bonds                                                               
and others.  It  is wise for the state to have  a revenue tied to                                                               
profits as  well as  revenues.   He suggested  that the  PPT will                                                               
make the state more competitive  and more similar to other fiscal                                                               
regimes.                                                                                                                        
                                                                                                                                
12:18:14 PM                                                                                                                   
                                                                                                                                
MR.  THOMPSON  said  his  view,   based  on  working  for  larger                                                               
companies  and  now  being  involved  with  a  small  exploration                                                               
company,  is that  the  PPT  can be  good  or  bad for  industry,                                                               
depending on  the company.   He said  for a  start-up exploration                                                               
company  such  as  AVCG, the  exploration  economics  provide  an                                                               
improvement  in near-term  cash flow  and an  improvement in  the                                                               
rates  of return.    He  said when  his  company  tries to  raise                                                               
private   equity  capital   in   Houston   or  elsewhere,   "they                                                               
principally look  at this  investor's rate  of return  and that's                                                               
very important  that we can show  them a system where  now Alaska                                                               
is  encouraging  exploration  because  that rate  of  return  for                                                               
exploration improves  with PPT  versus the  old system  of taxing                                                               
the revenues via the production tax."   He said he thinks the PPT                                                               
will attract new  capital to his company.  He  asked that the tax                                                               
rate be kept at 20 percent; a  rate of 25 percent would be unfair                                                               
because his  company is  also paying 12.5  to 16.66  [percent] in                                                               
royalty right  off the top.   It is also paying  corporate income                                                               
tax, property tax and other fees.                                                                                               
                                                                                                                                
12:20:33 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON  said that the tax  credit is important to  a little                                                               
company  like  his.    He  said   Alaska  is  his  only  area  of                                                               
investment, and  the exploration budget  is $46 million  for five                                                               
wells.  He  said if [AVCG] makes a discovery  of about 50 million                                                               
barrels,  it would  spend $250-$500  million in  development over                                                               
the  next few  years.   For  AVCG the  tax credit  "allows us  to                                                               
plough back  tax saving through  the credit into  our exploration                                                               
since this is the only place  we invest."  Mr. Thompson said that                                                               
for  a large  producer that  is  planning to  make large  capital                                                               
investments in oil or gasline  development the bill could be seen                                                               
as favorable.  He  said one concern is for a  producer who is not                                                               
planning to  make large investments  but plans to send  cash flow                                                               
outside without a high reinvestment rate in Alaska.                                                                             
                                                                                                                                
12:22:08 PM                                                                                                                   
                                                                                                                                
CO-CHAIR SAMUELS  asked if Mr.  Thompson's company is an  LLC and                                                               
if corporate income tax is different.                                                                                           
                                                                                                                                
MR. THOMPSON  relayed that as  an LLC,  AVCG is turning  in state                                                               
income  tax annually,  but he  is not  familiar with  whether the                                                               
treatment of  LLCs is different than  an S corporation.   He said                                                               
he will  check.   His company  has not had  revenues yet,  and if                                                               
there are  substantial discoveries,  there is the  possibility of                                                               
an Alaska public  offering to raise capital and  become a regular                                                               
corporation.   But,  he  said,  the company  would  like to  stay                                                               
private as long as  it can.  Even if it  doesn't have a corporate                                                               
income tax,  AVCG stills has  royalties as well as  various taxes                                                               
including federal taxes.                                                                                                        
                                                                                                                                
12:24:00 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON said  three things should not be changed  in HB 488.                                                               
He  said due  to  all the  other  taxes and  fees,  he hopes  the                                                               
legislature sees  that the  20 percent  [tax rate]  is fair.   He                                                               
noted  that  there wasn't  a  dramatic  improvement in  rates  of                                                               
return from a  model based on 25 percent as  compared to ELF, "so                                                               
why change if  it wasn't meaning something - if  I couldn't go to                                                               
investors, and  raise more equity  capital?"  His models  show an                                                               
improved rate  of return  at 20  percent PPT  as opposed  to ELF,                                                               
because it allows his company more  near-term cash flow.  "So the                                                               
state gives up something near term  and the investor gets it, and                                                               
that certainly helps  our payout time."  It also  means that soon                                                               
after AVCG's tax credits are  used up, soon after field start-up,                                                               
the  state  takes  a  higher  percentage  than  before  the  PPT.                                                               
"That's OK with me,"  he said.  "We get the  benefit in the early                                                               
years, and that really does improve our rate of return."                                                                        
                                                                                                                                
12:26:31 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON  said the 20  percent tax credit is  very meaningful                                                               
to his  company.  It allows  him to plough those  saving back in,                                                               
"and for each  five exploration wells, with a  20 percent credit,                                                               
I can drill  a sixth well with  the same budget."   He noted that                                                               
AVCG acquired eight of its ten leases at yesterday's lease sale.                                                                
                                                                                                                                
MR. THOMPSON  relayed that the third  aspect [in HB 488]  that he                                                               
wants to  see retained  is the standard  tax deduction,  which is                                                               
currently proposed at $73 million  per year in profits that would                                                               
not be  taxed.   It is  a good  concept, and  Norway uses  such a                                                               
concept in  its new  fiscal regime, although  it is  calculated a                                                               
bit  differently.   He  said  he  likes it  and  wants  it to  be                                                               
retained,  but it  will be  difficult to  explain to  the public.                                                               
But if this  exemption were 5,000 barrels a day,  which is really                                                               
where  the number  came  from,  it would  really  help his  small                                                               
company.  He stated that it would  be easier to sell that idea to                                                               
the public, the idea of giving  a major producer an exemption for                                                               
5,000 barrels of oil per day and taxing it on the rest.                                                                         
                                                                                                                                
12:30:39 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ETHAN  BERKOWITZ  opined  that  the  $73  million                                                               
exemption gives  disparate treatment to different  investors.  He                                                               
said a  preferable system  would correlate the  tax break  to the                                                               
reasonable  costs of  exploration  and development  of the  field                                                               
rather  than being  linked  to  the barrels  produced  or to  the                                                               
amount of $73 million.                                                                                                          
                                                                                                                                
12:31:26 PM                                                                                                                   
                                                                                                                                
MR.  THOMPSON pointed  out that  a standard  deduction should  be                                                               
kept very  simple.   The exemption  at 5,000  barrels per  day is                                                               
meaningful to a small company such  as his because it would allow                                                               
it to have  a lot of start-up costs offset.   Trying to correlate                                                               
it to  field costs  just makes  the issue  more complicated.   He                                                               
said  there was  an exemption  on the  first $20,000  of property                                                               
value for taxation on homeowners.   It helps the owner of a small                                                               
home a lot more  than a person with an expensive  home, but it is                                                               
nice to give everyone the same kind of treatment.                                                                               
                                                                                                                                
12:33:28 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GATTO asked  if  the exemption  would  be for  an                                                               
average of 5,000 barrels a day.                                                                                                 
                                                                                                                                
MR. THOMPSON  said there could  be rules for that,  but suggested                                                               
it could be averaged monthly or quarterly.                                                                                      
                                                                                                                                
CO-CHAIR SAMUELS said he agreed  that the public would understand                                                               
the  barrels-per-day  scenario, and  it  would  provide for  more                                                               
protection [for the state] at low prices.                                                                                       
                                                                                                                                
12:35:12 PM                                                                                                                   
                                                                                                                                
MR.  THOMPSON said  the $73  million  exemption is  sound and  he                                                               
wants to  keep it, but it  will be difficult to  align the public                                                               
and the legislature behind it.  He has heard strong opposition.                                                                 
                                                                                                                                
12:36:22 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE CRAWFORD noted  that no one can  foresee the price                                                               
of oil.   He said the bill  is setting a tax ceiling  with a one-                                                               
size-fits-all approach.  If the  price is going to average around                                                               
$24 per  barrel, this will  provide a  lot of concessions  to the                                                               
oil industry  and keep it  healthy, but if  the price goes  up to                                                               
$60  or $80  per barrel,  the economics  on all  of the  proposal                                                               
change very  drastically, and a 20  percent tax rate is  not fair                                                               
for Alaska.                                                                                                                     
                                                                                                                                
12:37:41 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON asked  Representative Crawford to keep  in mind that                                                               
when prices are high, Alaska takes  up to 16 2/3 percent straight                                                               
off  the  top for  royalties,  and  it  gets property  taxes  and                                                               
corporate income  taxes.   He said there  are federal  taxes too.                                                               
He  said a  25  percent  tax crosses  his  fairness  meter.   Mr.                                                               
Thompson relayed  that AVCG uses  $40 per barrel,  wellhead, plus                                                               
or minus $15, on its North Slope economic models.                                                                               
                                                                                                                                
12:40:19 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE CRAWFORD  noted that  the federal  government take                                                               
appears to  be 25 percent  of the  total government take,  and he                                                               
asked why Mr. Thompson has said it is 36 percent.                                                                               
                                                                                                                                
12:40:51 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON  said that AVCG,  when it  gets to a  sizable income                                                               
level, will have a corporate taxation  rate of 35 percent or more                                                               
on its taxable  income, which may translate to 25  percent of the                                                               
gross amount.                                                                                                                   
                                                                                                                                
12:42:22 PM                                                                                                                   
                                                                                                                                
CO-CHAIR  RAMRAS said  he wants  the state  to be  in partnership                                                               
with small and large producers.   He asked Mr. Thompson the value                                                               
of having  sellable credits and  the concern Mr.  Thompson raised                                                               
of having to  sell the credits at a discount  to large producers.                                                               
He  compared  oil exploration  to  pull-tab  gambling, and  asked                                                               
whether it  would be possible  to incentivize traded  or redeemed                                                               
credits in  such a way  that the  producers would be  required to                                                               
invest  further in  the state.    He suggested  that perhaps  the                                                               
state  could  offer  more  than  100 percent  to  get  the  small                                                               
producers to continue  to invest more and more in  the state.  He                                                               
said one of his concerns is  that the large producers will figure                                                               
out  how to  exploit the  accounting of  this mechanism,  and the                                                               
state  will not  see the  kind of  enticement that  it wants  for                                                               
small independents, like AVCG or Anadarko Petroleum Corporation.                                                                
                                                                                                                                
12:45:56 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON said his company  doesn't have revenue at this time,                                                               
so it may  hold its credit or, more likely,  AVCG would need cash                                                               
and so would  market the credits to the big  three producers.  In                                                               
the past,  the credits have sold  for about 95 percent  of value,                                                               
but  he doesn't  know the  price in  the future  because the  new                                                               
system  will provide  more credits  that companies  will want  to                                                               
sell to the  same number of limited buyers.   Even if his company                                                               
sells its credits to a big  producer, that producer will take 100                                                               
percent of that value to lessen the  taxes to the state.  He said                                                               
he  would much  rather see  a system  where the  state could  set                                                               
aside  a pool  of money  from  the taxes  it brings  in from  all                                                               
production.   If  the state  would buy  his company's  credits in                                                               
cash at 100 percent, his company  would commit to using the money                                                               
for  lease  sales, seismic  work,  or  exploration drilling.    A                                                               
similar  system was  set up  in  Norway for  small explorers,  he                                                               
said.  He  noted that a company  can choose to either  do that or                                                               
sell the credits at a discount to the major producers.                                                                          
                                                                                                                                
12:49:10 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  CRAWFORD suggested  a  floor price  at which  the                                                               
state would  pay for the credit.   He asked Mr.  Thompson if that                                                               
would be enough to have him  commit to exploration and whether he                                                               
would be amenable  to such a concept.  The  state wouldn't be "on                                                               
the hook  for writing a check  most of the time"  because a state                                                               
floor at 90 percent would  continue the large producers' interest                                                               
in the credits.                                                                                                                 
                                                                                                                                
12:50:28 PM                                                                                                                   
                                                                                                                                
MR. THOMPSON  noted that there  could be different  outcomes from                                                               
such an  approach.  If  AVCG sold its  credits for 90  percent of                                                               
value, the buyer would use it  to reduce the income to the state.                                                               
His company would have  the cash, but only 90 percent  of it.  He                                                               
said rather,  if his company  had the  credit from the  state, it                                                               
could be used when  the company buys a lease from  the state.  He                                                               
said  Norway makes  cash disbursements.   The  state may  want to                                                               
have a  limit of making  cash disbursements,  and make them  on a                                                               
first-come-first-served  basis.   When that  runs out,  the small                                                               
company would  have to sell  to a  producer or carry  it forward.                                                               
If  the state  made cash  disbursements and  then said  the money                                                               
would have to  be spent on "land, seismic,  and exploration, that                                                               
increases activity, which is what you're trying to accomplish."                                                                 
                                                                                                                                
12:53:01 PM                                                                                                                   
                                                                                                                                
MR.  THOMPSON   reiterated  comments   made  by  Mr.   Jim  Weeks                                                               
yesterday.   He said AVCG incurs  a lot of startup  costs similar                                                               
to indemnification costs, like bonding,  insurance, and oil spill                                                               
fees,  and he  would hope  that those  types of  measurable costs                                                               
could be  included as  deductions when  the determination  of net                                                               
value  of oil  and gas  is  made.   He said  the regulations  are                                                               
currently unclear on that point.   With regard to the $73 million                                                               
allowance, he said  he hopes that stays in some  form, or else he                                                               
suggests some type of exemption for smaller companies.                                                                          
                                                                                                                                
12:56:49 PM                                                                                                                   
                                                                                                                                
CO-CHAIR  RAMRAS  said  the  wells   AVCG  is  drilling  is  with                                                               
ConocoPhillips Alaska,  Inc. and  Pioneer, and  he asked  how the                                                               
$73 million provision  should be viewed in  situations when there                                                               
are multiple companies  taking it.  If those  three companies are                                                               
taking  the allowance,  "what do  we  do when  there's a  company                                                               
that's a  consortium of the  three of  your interests; is  that a                                                               
fourth entity?"                                                                                                                 
                                                                                                                                
MR. THOMPSON  replied negatively;  AVCG would get  that exemption                                                               
at the  state level for all  the profits that it  might have from                                                               
any sources of  oil anywhere in the state.   "So just our company                                                               
gets  that exemption."    He said  to  keep in  mind  that for  a                                                               
company that gets  that first $73 million without  the 20 percent                                                               
production tax,  it will still pay  $14 million on that  level of                                                               
production for  royalties, $7 million  for corporate  income tax,                                                               
$3 million to $5 million on  property tax, and $26 million to the                                                               
federal government.                                                                                                             
                                                                                                                                
12:59:17 PM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS noted that it  is still difficult to explain [the                                                               
$73 million exemption]  to his constituents who  are seeking more                                                               
funding for schools.                                                                                                            
                                                                                                                                
MR. THOMPSON acknowledged  that it would be  difficult to explain                                                               
to a  school district  that needs  $3 million  that the  state is                                                               
giving  an exemption  to a  company's $73  million profit,  so he                                                               
again suggested an exemption from  the first 5,000 barrels of oil                                                               
per day instead,  for public perception purposes only.   He would                                                               
rather have the $73 million allowance, he stated.                                                                               
                                                                                                                                
1:01:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD  asked whether  the provision  would tend                                                               
to  keep a  company  from growing  past a  profit  level of  $100                                                               
million, and encourage someone like  Mr. Thompson to form another                                                               
company.   The  concern he's  heard,  he relayed,  is that  "new"                                                               
companies will be formed from the same players.                                                                                 
                                                                                                                                
MR. THOMPSON opined that the  legislature should simply not allow                                                               
that  to  occur, but  he  doesn't  think  it would  occur  anyway                                                               
because of  the other  taxes that  aren't exempted.   He  said he                                                               
would  rather have  the economy  of  scale of  a growing  company                                                               
rather then creating small companies.                                                                                           
                                                                                                                                
1:03:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked about  the profits AVCG would have                                                               
in relation to the tax burden he  spelled out.  He noted that Mr.                                                               
Thompson listed  the numerical values  of all the taxes  he would                                                               
have to  pay, and so  he was curious  about what kind  of profits                                                               
would be achieved under that sort of situation.                                                                                 
                                                                                                                                
MR. THOMPSON relayed  that his highest cost burden  is the Trans-                                                               
Alaska Pipeline  System (TAPS).   He described  other costs.   He                                                               
said, "We're  not doing anything unless  we can make a  profit at                                                               
above  $25 per  barrel, so  when it  goes below  $25 some  of our                                                               
prospects do  not make it."   At $40  per barrel, his  company is                                                               
probably making a $15 to $20 per barrel before tax profit.                                                                      
                                                                                                                                
REPRESENTATIVE BERKOWITZ  noted that  the TAPS settlement  is due                                                               
for modification, and he asked Mr. Thompson's expectations.                                                                     
                                                                                                                                
MR.  THOMPSON said  that  the single  biggest  hurdle in  raising                                                               
capital is the uncertainty regarding  the TAPS tariff.  Last year                                                               
the TAPS tariff went up by 20  percent-in a single year.  He said                                                               
that is the  highest tax increase on the oil  and gas industry in                                                               
Alaska  than anything  the state  has done.   He  said he  wishes                                                               
something could be done to level  off the tariffs.  He noted that                                                               
the Federal Energy  Regulatory Commission is looking  at a tariff                                                               
structure  for  the natural  gas  pipeline  whereby it  would  be                                                               
"levelized" for five  to ten years. "I sure wish  the TAPS tariff                                                               
was  "levelized"  for  five  to  ten  years."    He  said  it  is                                                               
controversial, but it is his  company's biggest uncertainty along                                                               
with the  state's taxation.   He  said that is  why he  wants the                                                               
state to pass the PPT this year in the terms stated now.                                                                        
                                                                                                                                
1:07:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ surmised that  the state would have more                                                               
flexibility with its tax rate if it could help level the tariff.                                                                
                                                                                                                                
MR. THOMPSON said he hopes the tax rate stays at 20 percent.                                                                    
                                                                                                                                
1:08:15 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 1:08 p.m. to 1:23 p.m.                                                                       
                                                                                                                                
1:23:15 PM                                                                                                                    
                                                                                                                                
ROBERT  MINTZ,  Assistant Attorney  General,  Oil,  Gas &  Mining                                                               
Section,  Civil  Division,  Department  of Law,  noted  that  the                                                               
presentation last week  focused on the core elements  of the PPT,                                                               
and today's presentation  will be more detailed  and will include                                                               
general  issues   that  would  benefit  from   the  legislature's                                                               
attention.  He  referred to a slide pertaining to  Sections 1 and                                                               
11 [of HB  488] dealing with prevailing value  or the calculation                                                               
of the  gross value at  the point of  production of oil  and gas.                                                               
Usually  during an  arm's  length  sale, the  sale  price is  the                                                               
starting  point  for  valuation;  however,  the  current  statute                                                               
recognizes that there are situations  where it is not an adequate                                                               
guide to  value.  He said,  "Basically it says if  the sale price                                                               
is below what the actual prevailing  value in the market is, that                                                               
the department can substitute the prevailing value."                                                                            
                                                                                                                                
MR. MINTZ said sometimes there isn't  even a sale at all, and the                                                               
oil will  be retained  by the  producer and  run through  its own                                                               
refinery.   The literal language  in current law refers  to sales                                                               
price,  and  the  department has  interpreted  and  applied  that                                                               
provision  for  those situations.    He  said  there was  a  past                                                               
dispute, which was resolved favorably  for the department, and he                                                               
is not aware  of any further disputes.  But  Section 11 clarifies                                                               
that  point by  making sure  that prevailing  value applies  when                                                               
there is no  sale, and Section 1 adds legislative  intent on that                                                               
issue.    "The  slide  also  notes that  in  situations  where  a                                                               
simplified  formula   would  be   allowed  under  the   deal  for                                                               
calculating  prevailing  value  such   as  a  royalty  settlement                                                               
methodology,  this  would  probably  not even  come  up  in  that                                                               
situation."                                                                                                                     
                                                                                                                                
1:27:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ said  that  the rewrite  of Section  11                                                               
raises a question of the impacts on a proposed reserves tax.                                                                    
                                                                                                                                
MR. MINTZ  said he didn't think  anyone had that in  mind, and he                                                               
is not sure how to respond.                                                                                                     
                                                                                                                                
DAN DICKINSON,  Consultant to  the Office  of the  Governor, said                                                               
"This  would relate  only  to  the production  tax  paid, and  it                                                               
simply adds  the phrase  'not sold'."   He added  that he  is not                                                               
sure it  would speak to  any tax  outside of the  production tax.                                                               
Only the  barrels that are produced  are taxed under the  PPT, he                                                               
said.   A reserves tax would  be gas that had  not been produced,                                                               
so he doesn't think there is a connection.                                                                                      
                                                                                                                                
1:29:03 PM                                                                                                                    
                                                                                                                                
MR. MINTZ said,  "The production tax is a tax  that is deductible                                                               
for purposes of income tax;  there's no intention in changing the                                                               
production  tax under  this bill  to change  that deductibility."                                                               
He said Sections 2 and 3  simply adds language clarifying that it                                                               
continues to be deductible and  not added back to federal taxable                                                               
income when calculating state income tax.                                                                                       
                                                                                                                                
MR.  MINTZ  said  Sections  4  and  16  pertain  to  confidential                                                               
information,  and are  intended  to clarify  existing law,  which                                                               
generally makes taxpayers' tax information  confidential.  It has                                                               
an  exception  regarding  use in  an  official  investigation  or                                                               
proceeding.     He  said there  are  infrequent situations  where                                                               
information  from  certain  taxpayers  is  actually  relevant  in                                                               
determining another  taxpayer's tax, including  the determination                                                               
of prevailing values.    Sometimes it is necessary  to share that                                                               
information with  the taxpayer, which  has been the  practice but                                                               
includes  various  safeguards.    Because  existing  language  on                                                               
confidentiality  is so  general, [HB  488] clarifies  that it  is                                                               
permissible to  disclose "that kind of  information in carefully-                                                               
regulated  instances  to  taxpayers  for  calculating  their  own                                                               
taxes."   Additionally  those provisions  will  specify that  the                                                               
department has to impose conditions  on the disclosure to protect                                                               
it from misuse, and the  private persons who get the confidential                                                               
information  and  violate those  conditions  would  be liable  to                                                               
criminal  penalties that  apply  to state  employees who  violate                                                               
confidentiality restrictions.                                                                                                   
                                                                                                                                
CO-CHAIR  RAMRAS remarked  that  this provision  might relate  to                                                               
different taxpayers participating in  Alaska as part of different                                                               
entities, "and how we follow the sausage through the machine."                                                                  
                                                                                                                                
1:33:08 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON  noted that  there is  a section  in the  bill that                                                               
specifically addresses that issue.                                                                                              
                                                                                                                                
1:33:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON   asked   for   clarification   regarding                                                               
recipients of confidential information from other sources.                                                                      
                                                                                                                                
MR.  DICKINSON said  when the  state  established the  prevailing                                                               
value for sales on the West  Coast it looked at publicly reported                                                               
numbers, but when  it established the value for  Alaska, it looks                                                               
at all the  sales in Alaska and certain  adjustments and tariffs.                                                               
The state then  turns that figure to a taxpayer  whose market was                                                               
significantly below that average, and  taxes it on the prevailing                                                               
value instead  of what it  sold the oil for.   When the  state is                                                               
questioned  on  the source  of  that  prevailing value,  it  will                                                               
provide  sanitized,   sensitive  commercial  data   from  another                                                               
company.  The  information will typically go to  the attorneys or                                                               
agents of  the taxpayer, and they  sign a document that  they are                                                               
using the data only for those  purposes.  He noted that the point                                                               
is that "when  we share information with someone  in that company                                                               
under these  limited circumstances, we  want to bring  them under                                                               
the confidentiality umbrella."                                                                                                  
                                                                                                                                
REPRESENTATIVE SEATON surmised that it  is only when the state is                                                               
the source of that confidential information.                                                                                    
                                                                                                                                
MR. DICKINSON offered  his understanding that it  only relates to                                                               
the information the state has provided.                                                                                         
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked if it was cleanup language.                                                                      
                                                                                                                                
MR.  DICKINSON   said  it  is   taking  language   from  existing                                                               
regulations, making it a little  more general, and then moving it                                                               
into statute.                                                                                                                   
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked  if it is essential to  the PPT or                                                               
if it could have gone into another bill.                                                                                        
                                                                                                                                
MR. DICKINSON  replied that  it is not  essential, but  the state                                                               
wanted to ensure that it is cleaned up.                                                                                         
                                                                                                                                
1:36:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON surmised, then, that  it will only apply to                                                               
the PPT  and not a  general application for minerals  or anything                                                               
else.                                                                                                                           
                                                                                                                                
MR. DICKINSON  said the provision  "mainly goes in the  powers of                                                               
the Department  of Revenue,  and it  refers specifically..."   He                                                               
asked Mr. Mintz to explain.                                                                                                     
                                                                                                                                
MR.  MINTZ  explained that  the  provision  only relates  to  the                                                               
production  tax, and  he doesn't  think it  is intended  to apply                                                               
outside of it.                                                                                                                  
                                                                                                                                
REPRESENTATIVE SEATON said that will need to be clarified.                                                                      
                                                                                                                                
1:37:58 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said [the provision]  already exists for all taxes,                                                               
"and  we're  simply  extending  it."    It  takes  the  rules  of                                                               
confidentiality and applies it to this specific information.                                                                    
                                                                                                                                
MR.  MINTZ said  Section  5 is  simply the  enactment  of the  20                                                               
percent tax on net value.                                                                                                       
                                                                                                                                
REPRESENTATIVE BERKOWITZ noted that  Pedro van Meurs analyzed the                                                               
20  percent tax  with a  15  percent credit  as well  as a  25/20                                                               
split.  He asked about an analysis of the 20/20 proposal.                                                                       
                                                                                                                                
1:39:31 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said there was an analysis of the 20/20 proposal.                                                                 
                                                                                                                                
1:39:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked why that wasn't made available.                                                                  
                                                                                                                                
MR. DICKINSON said there were many analyses done.                                                                               
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked when it was done.                                                                                
                                                                                                                                
MR. DICKINSON said he wouldn't know the exact date.                                                                             
                                                                                                                                
REPRESENTATIVE ROKEBERG asked if that  is what was requested last                                                               
Friday.                                                                                                                         
                                                                                                                                
CO-CHAIR SAMUELS said  the legislature has requested  a series of                                                               
analyses, "so they are coming."                                                                                                 
                                                                                                                                
1:40:45 PM                                                                                                                    
                                                                                                                                
MR. MINTZ  relayed that Section 6  merely proposes to clean  up a                                                               
phrase that  purported to track  Internal Revenue  Code language,                                                               
but it  didn't quite do that.   Current statute uses  the phrase:                                                               
intangible drilling  and exploration expenses.   But the Internal                                                               
Revenue   Code  uses   the   phrase:   intangible  drilling   and                                                               
development costs.                                                                                                              
                                                                                                                                
1:41:41 PM                                                                                                                    
                                                                                                                                
MR.  MINTZ relayed  that Section  7  deals with  the monthly  tax                                                               
payments  and the  March true-up.   The  producers know  the most                                                               
about  their costs  and deductions.   Since  the true-up  payment                                                               
will  not  be   made  until  March  31  or   the  year  following                                                               
production, this provision  ensures that the state  will not have                                                               
to  pay interest  on any  overpayments  that may  have been  made                                                               
during those months, and if  there is overpayment, the state will                                                               
not have  to pay interest  until March  31, "and it  just repeats                                                               
current practice  by giving the state  a 90-day period to  make a                                                               
refund before interest starts to accrue."                                                                                       
                                                                                                                                
1:42:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked if  the taxpayer  is paying  on a                                                               
monthly  basis so  that  the benefit  of the  float  goes to  the                                                               
taxpayer.  He  noted that when he buys something,  he owes tax at                                                               
that moment.                                                                                                                    
                                                                                                                                
MR. DICKINSON said  he thinks it's the other way  around.  If the                                                               
state was underpaid  in any month the company owes  interest.  If                                                               
the state was  overpaid, the state does not owe  interest.  There                                                               
is only interest  due to the taxpayer if the  state is beyond the                                                               
90-day timeframe in refunding the overpayment.                                                                                  
                                                                                                                                
REPRESENTATIVE  BERKOWITZ asked  if  tax payments  could be  made                                                               
daily since the oil is metered.                                                                                                 
                                                                                                                                
MR. DICKINSON said, "We never considered daily tax payments."                                                                   
                                                                                                                                
1:44:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO asked if the interest rate is stated.                                                                      
                                                                                                                                
MR.  DICKINSON  said  another  statute  sets  it  at  11  percent                                                               
compounded quarterly.                                                                                                           
                                                                                                                                
CO-CHAIR  SAMUELS said  [personal income  tax] is  not due  until                                                               
April 15th and taxpayers are the beneficiaries of the float.                                                                    
                                                                                                                                
1:45:09 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said it applies to all taxes.                                                                                     
                                                                                                                                
1:45:46 PM                                                                                                                    
                                                                                                                                
MR.  MINTZ  said Section  8  is  a  technical change  to  conform                                                               
language that the  new tax would apply to oil  and gas aggregated                                                               
all over the  state, and so existing language must  be changed to                                                               
address language on separate taxes for oil and gas.                                                                             
                                                                                                                                
CO-CHAIR SAMUELS  noted that  Representative Crawford  has wanted                                                               
to know  if the gas in  the bill, absent a  gasline, only applies                                                               
to Cook Inlet or Nenana Basin.                                                                                                  
                                                                                                                                
MR.  DICKINSON said  that as  currently drafted,  HB 488  assumes                                                               
there  is  no gasline,  so  it  will  apply to  all  hydrocarbons                                                               
produced in the state.                                                                                                          
                                                                                                                                
1:47:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAPSNER  said the bill almost  always includes gas                                                               
when it  references oil, and  she asked why  is there not  a bill                                                               
for  each; they  are very  different commodities  with regard  to                                                               
production and marketing.                                                                                                       
                                                                                                                                
MR. DICKINSON told her to focus  on the bill's recognition of the                                                               
costs of production as deductible.                                                                                              
                                                                                                                                
REPRESENTATIVE   KAPSNER  surmised,   then,   that  any   capital                                                               
expenditures on gas can be deducted from oil profits.                                                                           
                                                                                                                                
MR.  DICKINSON said  any  upstream expenditures  on  gas will  be                                                               
deducted from the  PPT calculation.  To clarify  further, he said                                                               
that a sales line  to Chicago or a gas treatment  plant to get it                                                               
into a  sales line will  not be considered  part of the  costs of                                                               
production.  He  said those costs will be  calculated in net-back                                                               
value, "but they  will not be available for the  kinds of credits                                                               
we've identified  in this  bill.  They're  not available  for the                                                               
operating deduction."                                                                                                           
                                                                                                                                
1:48:42 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said the idea is  that in Prudhoe Bay the equipment                                                               
is indistinguishable between  the two.  "You punch a  hole in the                                                               
ground and  oil and gas come  out together."  Separating  the two                                                               
costs  would be  a bureaucratic  exercise that  could be  done if                                                               
there was value  to it.  He noted that  property tax doesn't make                                                               
a distinction.   "When you  are out  exploring, we don't  want to                                                               
try  to  figure out  afterwards,  were  you  looking for  oil  or                                                               
looking for gas."   Regarding the main  things being identified--                                                               
development,  production,  and  exploration--oil and  gas  are  a                                                               
joint process and it is hard to separate the costs.                                                                             
                                                                                                                                
1:49:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAPSNER asked  how hard would it be  if there were                                                               
two different bills.                                                                                                            
                                                                                                                                
MR. DICKINSON said a high level  of assumptions could be made, or                                                               
the  state could  ask  for  all the  ratios  for  every piece  of                                                               
equipment.     Accountants  wrestle  with  joint   cost  problems                                                               
continually and find them very hard to solve.                                                                                   
                                                                                                                                
1:50:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO  asked if the  resource is considered  to be                                                               
"produced" as soon as it comes out  of the ground or not until it                                                               
comes out of the pipeline.                                                                                                      
                                                                                                                                
MR. DICKINSON explained that oil  is considered produced after it                                                               
is  separated, metered,  and  measured  and ready  to  go in  the                                                               
pipeline.  He  said gas is considered produced  "either when that                                                               
first level of separation occurs...or  when you go through what's                                                               
called  a gas  processing plant,  when it  is separated  from the                                                               
hydrocarbon  liquids  that  you're  going to  do  something  else                                                               
with."                                                                                                                          
                                                                                                                                
REPRESENTATIVE GATTO  asked whether the argument  could made that                                                               
"this stranded  gas has been  produced more than once  and shoved                                                               
back into a reservoir," and thus taxable.                                                                                       
                                                                                                                                
MR.  DICKINSON  said   that  argument  could  be   made,  or  the                                                               
legislature  could define  gas that  has come  to the  surface as                                                               
being produced.   He said there  is currently no way  to monetize                                                               
that gas.   "You get  more oil production  by putting it  down in                                                               
the  ground,  and so  it's  simply  viewed  as  a cost  of  doing                                                               
business and keeping the oil rates from declining even further."                                                                
                                                                                                                                
REPRESENTATIVE  GATTO suggested  clarifying what  the legislature                                                               
means by the term "produced".                                                                                                   
                                                                                                                                
1:52:51 PM                                                                                                                    
                                                                                                                                
MR. MINTZ added that Representative  Gatto's concern is addressed                                                               
because gas that is used in  the operation of a lease or property                                                               
for repressuring,  for example,  is not  considered gas  that has                                                               
been  produced for  purposes  of  the production  tax.   He  said                                                               
current statute  deals with that, and  HB 488 deals with  it in a                                                               
slightly different way.                                                                                                         
                                                                                                                                
1:54:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD asked for  information regarding gas used                                                               
in production to run the field  including how it is taxed and how                                                               
it will be dealt with in the future.                                                                                            
                                                                                                                                
MR. DICKINSON said,  using Prudhoe Bay as an example,  there is a                                                               
central  gas facility  with 8.5  billion cubic  feet per  day [of                                                               
gas] being put back in  the ground for "repressurization".  There                                                               
are two  additional streams "that come  off of that."   One looks                                                               
like gas and is sold to industrial  users on the North Slope.  He                                                               
said there is  a four-inch line that goes to  the first four pump                                                               
stations of  TAPS, and that is  how they are powered.   There's a                                                               
number of times in which there  will be third-party sales of gas,                                                               
and that is taxed, he noted.                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS asked what rate that gas is taxed at.                                                                          
                                                                                                                                
MR. DICKINSON said the base rate  is 10 percent and then there is                                                               
a gas  ELF.   The last  stream [of gas]  is natural  gas liquids,                                                               
which are  broken into  two pieces.   He said  half are  taken to                                                               
Kuparuk  and are  injected to  help  oil production  and are  not                                                               
taxed.   The last stream [of  gas] is about 45,000  barrels a day                                                               
and is  put in  TAPS where  is gets commingled  with the  oil and                                                               
sold in the Lower 48 as if it  were oil.  There is a piece of the                                                               
production in  TAPS, which  under current  statute is  defined as                                                               
gas  and it  is valued  as  though it  were oil,  and once  value                                                               
calculation are made, it is multiplied by the gas ELF.                                                                          
                                                                                                                                
REPRESENTATIVE CRAWFORD asked how the bill will change that.                                                                    
                                                                                                                                
1:57:01 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON  said, "For the  stuff used in production,  it will                                                               
not change  it.   In other  words, we are  still saying  that gas                                                               
used in production will not be taxed."                                                                                          
                                                                                                                                
REPRESENTATIVE  CRAWFORD asked  about the  gas used  in the  pump                                                               
stations.                                                                                                                       
                                                                                                                                
MR.  DICKINSON said  that when  it is  used for  TAPS, it  is not                                                               
considered  part of  production, because  once it  passes through                                                               
the meter at pump  station one, it is a third-party  sale.  It is                                                               
similar to fueling a tanker, and it is taxable.                                                                                 
                                                                                                                                
REPRESENTATIVE CRAWFORD asked about the new tax.                                                                                
                                                                                                                                
MR. DICKINSON said it will be covered under [HB 488].                                                                           
                                                                                                                                
1:58:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS asked  about getting the cost  recovery for that                                                               
portion of gas.                                                                                                                 
                                                                                                                                
MR.  DICKINSON said,  "You calculate  the  total costs--the  cash                                                               
outlays to run  Prudhoe Bay--and then you stick that  in the PPT,                                                               
and that becomes deductible for purposes  of oil and gas.  And if                                                               
you're using  gas internally, you  don't go out and  calculate up                                                               
what it would have  been had you had to go  out and purchase that                                                               
gas."                                                                                                                           
                                                                                                                                
1:58:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  LES GARA  asked since  the current  system has  a                                                               
different tax for  gas and oil, it must recognize  that there are                                                               
different economics in the two industries.   He asked what is the                                                               
case  that  the   economics  are  so  similar   between  the  gas                                                               
market/production and oil market/production,  "that we would just                                                               
slap the same exact tax onto both of them?"                                                                                     
                                                                                                                                
MR.  DICKINSON  said  no  one would  argue  that  the  downstream                                                               
economics  are  the  same.     The  biggest  difference  is  that                                                               
transportation  costs   for  gas  will  consume   a  much  bigger                                                               
percentage of the end value than oil.   He said HB 488 is focused                                                               
on the  cost of  production.  That  cost is a  single cost.   "So                                                               
what  we've  done here  is  put  in  place  a deduction  for  the                                                               
upstream cost and  a credit for the capital  investments that are                                                               
made and a  credit for the exploration.  All  of those things are                                                               
identical for oil  and gas."    He said the vast  majority of the                                                               
hydrocarbons  sold are  oil,  "and  this bill  is  attune to  the                                                               
economics  of that  oil."    He said  the  only  gas moving  into                                                               
markets is  Cook Inlet gas,  and it is used  in Alaska.   He said                                                               
ConocoPhillips  Alaska,  Inc.  has   an  export  facility.    The                                                               
economics in  Cook Inlet are  changing, and it has  been isolated                                                               
from world markets.  There  is one contract bringing world market                                                               
prices  into Cook  Inlet,  and  he thinks  that  will change  the                                                               
situation, "as  we analyze it...the  economics reflected  in this                                                               
bill seem to be appropriate."                                                                                                   
                                                                                                                                
2:01:06 PM                                                                                                                    
                                                                                                                                
MR.  DICKINSON said,  "I will  confess  to you  that under  these                                                               
conditions you  probably would not have  a gas line, a  major gas                                                               
sale,  on the  North  Slope without  the kind  of  thing that  is                                                               
anticipated  under  the  stranded  gas  contract.    This  wasn't                                                               
anticipated to create the conditions for  a major gas sale on the                                                               
North Slope.   We believe  it will  help set the  boundaries, the                                                               
parameters, for  when that occurs."   He noted that there  are no                                                               
features  in  [HB   488]  designed  to  encourage   the  kind  of                                                               
downstream costs  that are going to  be the major costs  in a gas                                                               
line project.                                                                                                                   
                                                                                                                                
2:02:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ noted that the  economics of oil and gas                                                               
are  different,  and yet  the  taxing  strategies are  identical,                                                               
including property tax, royalties,  corporate income tax, and now                                                               
the production tax is the same.   There is no recognition by this                                                               
bill that the economics are different.                                                                                          
                                                                                                                                
MR.   DICKINSON  said   Representative  Berkowitz   has  properly                                                               
identified the fact that the other taxes are the same.                                                                          
                                                                                                                                
REPRESENTATIVE  BERKOWITZ said  there is  no distinction  between                                                               
oil and groceries either.                                                                                                       
                                                                                                                                
MR.  DICKINSON said  property tax  only  applies to  oil and  gas                                                               
property, and there is one income  tax for oil and gas taxpayers.                                                               
"They  make quite  a distinction  between groceries  and oil  and                                                               
gas."                                                                                                                           
                                                                                                                                
REPRESENTATIVE BERKOWITZ pointed out that  the current gas tax is                                                               
different  than  the current  oil  tax  and  yet they  are  being                                                               
blended.                                                                                                                        
                                                                                                                                
MR. DICKINSON  said that  is correct.   The  downstream economics                                                               
are different; the upstream economics are  not.  It costs as much                                                               
to explore  and put a  hole in the ground  looking for oil  as it                                                               
does looking for gas, he stated.                                                                                                
                                                                                                                                
REPRESENTATIVE  BERKOWITZ said  there  has been  no testimony  to                                                               
that effect.   He posited that everyone knows there  is "a ton of                                                               
gas  sitting up  at Pt.  Thompson" and  people are  struggling to                                                               
find meaningful oil deposits.  So the economics are different.                                                                  
                                                                                                                                
MR. DICKINSON said  there is also a great deal  of oil condensate                                                               
at Pt. Thompson.                                                                                                                
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  if taxing  on profits  will level                                                               
the tax [between oil and gas].                                                                                                  
                                                                                                                                
MR. DICKINSON said he thinks that is true.                                                                                      
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  the state  will be  taxing on  the                                                               
bottom line, and any peculiarities of production...                                                                             
                                                                                                                                
2:05:16 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said that additional  rules are appropriate.  It is                                                               
absolutely  correct   that  profitability   is  a  good   way  of                                                               
equalizing everything, he  added.  The legislature  could say the                                                               
two are not equal and do something different.                                                                                   
                                                                                                                                
REPRESENTATIVE  KAPSNER pointed  out that  the bill  doesn't just                                                               
tax on  profits; there are  a number of different  credit schemes                                                               
that aren't just about profit.                                                                                                  
                                                                                                                                
CO-CHAIR  SAMUELS said  he agrees  with Representative  Rokeberg.                                                               
If it costs more to develop  gas, "you allocate for all the costs                                                               
and then  you tax on  the profits."   He noted that  Nenana Basin                                                               
may  have no  oil.   He said  the committee  can argue  about the                                                               
percentage.  He  said the equalizer is based on  profit, and that                                                               
is  what the  bill does.   "The  bottom line  is you  are talking                                                               
about splitting up the profits,  and if the profits are different                                                               
for oil  than they  are for  gas, that  will come  out, generally                                                               
speaking, in the wash."                                                                                                         
                                                                                                                                
2:07:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked if gas has a different ELF.                                                                         
                                                                                                                                
MR. DICKINSON said it does.                                                                                                     
                                                                                                                                
REPRESENTATIVE  SEATON surmised  that  the  production tax  being                                                               
paid for gas fields are different than for oil fields.                                                                          
                                                                                                                                
MR. DICKINSON said  that is correct.  "Furthermore if  you have a                                                               
single  field like  Prudhoe Bay  that is  producing both  gas and                                                               
oil, you first  have to do what's called  a well-days allocation,                                                               
so that each well  you figure out how much of that  is a gas well                                                               
and how much of that is an oil  well.  And then you calculate the                                                               
gas ELF based on  the gas well days and the oil  based on the oil                                                               
well days."                                                                                                                     
                                                                                                                                
REPRESENTATIVE SEATON  noted that  a number  of things  have been                                                               
done  for  gas  to   encourage  production,  including  different                                                               
royalties,  ELF  and credits.    He  stated  the problem  is  not                                                               
knowing the differential impact on gas exploration from the PPT.                                                                
                                                                                                                                
MR. DICKINSON said ConocoPhillips  Alaska, Inc. may be different,                                                               
but  "in general,  when  you look  at a  gas  project which  will                                                               
export gas  to the lower  48, comparable  with oil, you  have the                                                               
same thing.   You have a huge  structure that needs to  be put in                                                               
place.  If  what you're talking about is simply  moving it around                                                               
Cook  Inlet.   I mean  there are  costs there,  but they  are not                                                               
comparable to moving it to the  lower 48.  So when you're looking                                                               
at a  gas market that  is essentially a  local market, that  is a                                                               
different set  of dynamics than  a market that is  essentially an                                                               
export market.   But the notion  is, I mean, typically,  I think,                                                               
in the lower  48, one thinks of the gas  as being more challenged                                                               
as compared to oil.  But  here we're talking about a local market                                                               
for gas and an export market for oil."                                                                                          
                                                                                                                                
REPRESENTATIVE SEATON  said that  is where he  is not  seeing the                                                               
differentiation on these two very  different commodities, as they                                                               
are currently being  produced in Alaska.  He said  a gas pipeline                                                               
would  be  understandable,  but  that  is  not  Alaska's  current                                                               
production, "and I don't want to  get into the situation where we                                                               
create  a   tax  scheme   that  disincentivizes   production  for                                                               
Alaskans, just because we threw it in with the oil tax."                                                                        
                                                                                                                                
2:10:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  asked how  much Alaska  currently makes  on gas                                                               
tax.                                                                                                                            
                                                                                                                                
MR. DICKINSON  said it  is in  the $50 million  range; it  is not                                                               
trivial.                                                                                                                        
                                                                                                                                
2:11:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA remarked  that taxing both oil and  gas in an                                                               
income tax  makes some sense,  "but if a  15 percent tax  rate on                                                               
oil results  in profit margins  of 40  percent, but a  15 percent                                                               
tax rate on  gas results in profit margins of  3 percent, then it                                                               
doesn't  make sense  to tax  both the  same exact  way.   I think                                                               
that's  the point.    The same  exact tax  rate  on two  separate                                                               
industries,  even though  it is  a corporate  income tax,  causes                                                               
some concern."                                                                                                                  
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  noted that  the  state  is making  $15                                                               
million  on gas  tax now,  and he  asked how  much would  be made                                                               
under the PPT.                                                                                                                  
                                                                                                                                
MR. DICKINSON  remarked that the  problem is in  determining what                                                               
costs are  gas and what  costs are oil.   He said he  hasn't done                                                               
that in his head.                                                                                                               
                                                                                                                                
REPRESENTATIVE  BERKOWITZ pointed  out  that  the legislature  is                                                               
being  asked to  create a  taxing  structure, and  it needs  that                                                               
information.  He  asked if the tax  will go up or  down under the                                                               
PPT.                                                                                                                            
                                                                                                                                
MR. DICKINSON  said the accountants  could provide  either answer                                                               
depending on allocation  of costs.  "You could  certainly look at                                                               
players such as Marathon, who is  primarily a gas player, look at                                                               
their taxes.   The total  of gas and oil  together will go  up at                                                               
higher prices.   And looking at how that's  allocated between the                                                               
two,  I mean  we could  certainly run  through the  numbers.   My                                                               
point  is that  there's  a  judgment that  you're  going to  make                                                               
that's going  to be influenced  by how  you look at  joint costs.                                                               
But we could certainly look at  a gas field, and say 'Here's what                                                               
happens in a gas field, here's  what happens when exploring a gas                                                               
field,' I mean,  that exercise is something that,  I think, Roger                                                               
Marks went through  in his exercise showing us what  was going on                                                               
in Cook  Inlet.  And  I can  certainly revisit those  slides with                                                               
you if you'd like."                                                                                                             
                                                                                                                                
2:14:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  said this is  not a trivial  issue, and                                                               
there is  a question of proper  due diligence on the  part of the                                                               
administration.   "If Cook  Inlet gas, for  example, is  in short                                                               
supply  and they  haven't done  analysis, and  it turns  out that                                                               
this  jacks up  the tax  rate  considerably that  would make  the                                                               
economics  of Cook  Inlet gas  worse than  they are  today, which                                                               
will put energy in  South Central in some danger.   I think it is                                                               
the administrations  responsibility, since they are  putting this                                                               
bill forward, to have those numbers ready for us.                                                                               
                                                                                                                                
MR. DICKINSON  said he  believes that  on the  existing producing                                                               
fields in  Cook Inlet, the tax  would go up, but  explorers would                                                               
pay  lower taxes.    He said  it is  important  to maintain  that                                                               
distinction.  He said he is  being a bit vague because he doesn't                                                               
have those numbers available, but that work has been done.                                                                      
                                                                                                                                
REPRESENTATIVE CRAWFORD asked  if the change in the  gas tax will                                                               
result in  an increase or  decrease in  the tax collected  on the                                                               
North Slope pipeline quality gas.                                                                                               
                                                                                                                                
MR. DICKINSON  said he  will provide  that, but  there will  be a                                                               
huge assumption on how costs are allocated.                                                                                     
                                                                                                                                
CO-CHAIR  SAMUELS   asked  him   to  respond   to  Representative                                                               
Berkowitz's question tomorrow.                                                                                                  
                                                                                                                                
MR. DICKINSON said he will look  at Roger Marks's slides and look                                                               
at that.  He will try to get it by then.                                                                                        
                                                                                                                                
2:16:27 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON noted that in 2005  the total production tax on gas                                                               
was $55 million with $30.5 million of it in the TAPS line.                                                                      
                                                                                                                                
2:17:13 PM                                                                                                                    
                                                                                                                                
MR.  MINTZ said  the  next  three slides  pertain  to Section  9,                                                               
taxation of  royalty interest.   He said  it affects only  a very                                                               
tiny proportion  of the oil and  gas produced in Alaska  and only                                                               
changes current law in one respect.  He continued:                                                                              
                                                                                                                                
     Current production tax and  the production tax proposed                                                                    
     under this bill would subject  all oil and gas produced                                                                    
     in the  state to production tax  except that proportion                                                                    
     that's  exempt.   The  exempt  portion  is the  royalty                                                                    
     share that's  either owned  by the  state in  state oil                                                                    
     and gas leases or by  the federal government in federal                                                                    
     oil and  gas leases.   So the vast majority  of royalty                                                                    
     oil is  tax-exempt because it's  owned by the  state or                                                                    
     federal  government.   But the  next thing  to keep  in                                                                    
     mind is on  private oil and gas  leases, which accounts                                                                    
     for  only  a  very  small   fraction  of  oil  and  gas                                                                    
     production.  That royalty share  is subject to tax.  It                                                                    
     is subject to tax under  current law; it would still be                                                                    
     subject  to tax  under this  bill.   However, it's  the                                                                    
     producer that  is liable  for paying  the tax.   That's                                                                    
     true under current law; it  would remain true.  Because                                                                    
     the  producer is  liable for  paying the  tax, but  the                                                                    
     royalty owner  actually gets the  royalty share  or its                                                                    
     equivalent in  value, current  law allows  the producer                                                                    
     to pass on the tax on  the royalty share to the royalty                                                                    
     owner,  typically  by  deducting   that  tax  from  the                                                                    
     royalty that's paid to the owner.                                                                                          
                                                                                                                                
                                                                                                                                
MR.  MINTZ said  HB  488 deals  with a  complication  in how  the                                                               
royalty share is  calculated.  The new tax would  be on the value                                                               
of oil  and gas produced  from all  leases and properties  in the                                                               
state for  a given producer, subtracting  all lease expenditures.                                                               
There is  no easy  or obvious  determination for  the tax  on the                                                               
royalty share of particular leases.   So Section 9 will provide a                                                               
default mechanism  for calculating the  royalty share of  the tax                                                               
in  the absence  of an  agreement  between the  producer and  the                                                               
royalty owner or some  other method, he stated.  He  said it is a                                                               
pro rata tax based on the producer's statewide taxes.                                                                           
                                                                                                                                
2:20:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS said "If the state  owns the royalty, you get it                                                               
off the top.  But if an  individual Alaskan or a company owns the                                                               
royalty, they have to absorb a portion of the costs."                                                                           
                                                                                                                                
REPRESENTATIVE  KAPSNER asked  about  if an  example  would be  a                                                               
Native corporation.                                                                                                             
                                                                                                                                
MR. DICKINSON  said yes.   He said  a private royalty  owner does                                                               
not  have to  share in  upstream  costs either,  and that's  what                                                               
makes the new  tax difficult to pass on.   He said royalty owners                                                               
generally  receive their  royalty  free and  clear of  production                                                               
costs,  so this  difficulty  arises.   The  company paying  those                                                               
costs doesn't  share them with  the royalty owner, so  why should                                                               
it share the benefit of the  credits or deductions, he said.  The                                                               
taxpayer with private royalty interests  and with an agreement to                                                               
pass on  the costs takes  the total tax  paid by the  company and                                                               
divides that by the non-royalty  barrels, he explained.  Then the                                                               
taxpayer multiplies that  times the private royalty  barrels.  He                                                               
gave  the committee  an example  of a  taxpayer with  two leases,                                                               
producing  100 barrels  from  each.   One  lease  belongs to  the                                                               
state, he said,  and one belongs to a corporation.   Both have 12                                                               
percent royalties.   He said  to assume  that the gross  value is                                                               
$10 per  barrel, totaling $2000,  he said.   "What they'll  do is                                                               
they'll take  that wellhead  value of $10  per each  barrel, they                                                               
will multiply  it times the  total barrels  that tax is  due on."                                                               
He  said for  the state  share it  is 87.5  barrels, but  for the                                                               
private royalty  owner it  would be  all 100  barrels.   He said,                                                               
"You take that  $10 and you multiply times 187.5  barrels, and so                                                               
the tax basis is going to be  1,875."  He then subtracted $875 in                                                               
lease costs and  other upstream costs to arrive at  the net basis                                                               
of $1,000. He  said to multiply that by the  20 percent tax rate,                                                               
and the producer owes  $200.  When it is time  to pay the royalty                                                               
owner,  the company  will get  to deduct  those taxes  from those                                                               
private  barrels, he  stated.   He  said that  exists in  current                                                               
statutes, but "the problem is defining what that number is."                                                                    
                                                                                                                                
MR.  DICKINSON  said the  total  taxes  were  $200, and  then  he                                                               
divided  by all  the non  royalty barrels,  so each  barrels pays                                                               
$1.14 in tax.  He multiplied  that by the private royalty barrels                                                               
and came up  with $14.29.  The company will  subtract that before                                                               
making a settlement with the royalty owner, he said.                                                                            
                                                                                                                                
2:28:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO  asked if the  non-royalty barrels  can ever                                                               
be zero.                                                                                                                        
                                                                                                                                
MR.  DICKINSON asked  Mr. Mintz  if there  is any  other way  for                                                               
producing for a mineral interest other than a lease.                                                                            
                                                                                                                                
MR. MINTZ said the non-royalty barrels  could be zero if there is                                                               
no production,  but they could  never be zero unless  the royalty                                                               
barrels are also zero.                                                                                                          
                                                                                                                                
MR. DICKINSON said, "Or if there was 100 percent royalty rate."                                                                 
                                                                                                                                
REPRESENTATIVE GATTO  said if the  non-royalty barrels  are zero,                                                               
then the total tax is infinite.                                                                                                 
                                                                                                                                
MR. DICKINSON said  either there would be no  barrel produced and                                                               
thus no tax, or a hypothetically 100 percent royalty interest.                                                                  
                                                                                                                                
2:30:20 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  said,  "You're  treating  different  royalties                                                               
differently."                                                                                                                   
                                                                                                                                
MR. DICKINSON  said the state is  trying to treat them  the same.                                                               
"From the point of view of  the state, they are indifferent about                                                               
whether it is  a private royalty barrel or  a non-royalty barrel.                                                               
The only royalties that the  state treats differently are its own                                                               
royalty barrels and the federal royalty barrels."                                                                               
                                                                                                                                
REPRESENTATIVE  CRAWFORD said,  "If it's  the calculation  of the                                                               
tax on the  state's 100 barrels, the state gets  $200 plus 1/8 of                                                               
the  value of  the...royalty.   That's what  they get.   And  the                                                               
state gets,  from the  100 barrels on  the private  royalty, they                                                               
get $200  plus $14.29,  but they don't  get the  royalty, because                                                               
that went to the royalty owner.  Is that how that works?"                                                                       
                                                                                                                                
MR.  DICKINSON said,  yes, sort  of; the  $14.29 is  part of  the                                                               
$200.  "They've  paid [the state] $200," he said.   But Section 9                                                               
says that since  some of that $200 was tax  that arose because of                                                               
royalty barrels,  the costs that  accrue to the company  with the                                                               
lease can be passed to the...                                                                                                   
                                                                                                                                
REPRESENTATIVE CRAWFORD interjected that  the state got $200, but                                                               
$14.29 of it was paid from the royalty owner to the producer.                                                                   
                                                                                                                                
MR. DICKINSON  said it is something  like that.  The  legal point                                                               
is that the  tax obligation is to the producer.   A private lease                                                               
owner does not have a tax obligation to the state.                                                                              
                                                                                                                                
2:33:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  remarked that  the old and  new versions                                                               
of this provision are default  provisions, because there could be                                                               
a private  contract between the  royalty owner and  the producer.                                                               
He spoke of the  word "may" in line 2, and  assumed that it could                                                               
be a default  in the absence of  an agreement.  He  noted that in                                                               
most  places  in  the  lower   48,  private  owners  receive  the                                                               
royalties, not  the state.   He said  he assumes the  amount that                                                               
could be passed on would be greater under the PPT than the ELF.                                                                 
                                                                                                                                
MR. DICKINSON  said that would  be correct if no  investments are                                                               
made  and the  price of  oil is  high.   "The paradox...is,  what                                                               
happens when a  producer makes a large investment"  and pays zero                                                               
taxes?  "Is there  a tax to pass on to  the private royalty owner                                                               
or not?"  He said that is what this formula attempts to address.                                                                
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked about  the two having  a different                                                               
agreement that  does not deduct  that royalty payment as  part of                                                               
the royalty share.  "Should  they not deduct that royalty payment                                                               
as part of their production expenses in PPT?"                                                                                   
                                                                                                                                
MR. DICKINSON said the royalty is not a deductible expense.                                                                     
                                                                                                                                
2:36:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAPSNER asked  whether it  would be  possible for                                                               
both the royalty owners to get their share off the top.                                                                         
                                                                                                                                
MR. DICKINSON  said yes;  they do  both get  their share  off the                                                               
top.   The difference is that  the state has passed  a law saying                                                               
that there is  no tax on the state's royalty  share, but it isn't                                                               
extending  that same  consideration to  a private  royalty owner.                                                               
He said  in his mind, "off  the top" means the  production costs,                                                               
and so "what  you're saying is there is an  additional cost which                                                               
a private royalty  owner must bear, and a  public, someone having                                                               
a lease...does not.  I think that's a correct observation."                                                                     
                                                                                                                                
REPRESENTATIVE KAPSNER  said the state  doesn't pay a tax  on the                                                               
royalty, and the private owner does.                                                                                            
                                                                                                                                
MR.  DICKINSON  said  it  is  the other  way  around,  the  state                                                               
receives a tax  and the company producing the oil  has to pay the                                                               
tax on all of the oil it  produces from a private lease, but only                                                               
on 87.5 percent of the oil it produces from a state lease.                                                                      
                                                                                                                                
2:37:36 PM                                                                                                                    
                                                                                                                                
MR.  MINTZ  said  Section  10  deals with  the  issue  raised  by                                                               
Representative Gatto,  and it amends  AS 43.55.020 (e).   He said                                                               
that currently it  addresses the tax treatment of  gas that never                                                               
makes  it to  the  sales meter.    There are  two  ways that  can                                                               
happen, he said, if it is  used in lease operations or reinjected                                                               
for pressure maintenance.   The statute will  continue to provide                                                               
that such gas is tax-exempt.   He explained that flared or vented                                                               
gases are  exempt from tax if  it is flared for  safety purposes.                                                               
If it  is flared  wastefully it  will be taxed  and subject  to a                                                               
penalty.   Gas  that  is authorized  to be  flared,  but not  for                                                               
safety  purpose, is  taxed  but not  subject to  a  penalty.   He                                                               
pointed  out  that  it  is  harder  under  HB  488  to  define  a                                                               
particular tax  on a  particular lease, so  the bill  will simply                                                               
put  flared  gas  into  two   categories.    If  the  flaring  is                                                               
authorized, it will  be tax exempt, and if it  is not authorized,                                                               
it will be subject to tax.                                                                                                      
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked  how much flared gas  is taxed and                                                               
subject to penalty.                                                                                                             
                                                                                                                                
MR. MINTZ it is a small part of the overall revenue picture.                                                                    
                                                                                                                                
MR. DICKINSON said  he believes it constitutes  tens of thousands                                                               
of dollars.                                                                                                                     
                                                                                                                                
REPRESENTATIVE BERKOWITZ  said waste will not  be penalized under                                                               
HB 488.                                                                                                                         
                                                                                                                                
MR.  MINTZ said  that  is correct  for  production tax  purposes;                                                               
however, wasted gas is also subject  to a penalty assessed by the                                                               
Alaska  Oil and  Gas  Conservation Commission,  and  that is  not                                                               
affected by  HB 488.  He  said that under current  law, there are                                                               
two penalties  assessed on flared  gas, and under the  bill there                                                               
will only be one penalty, and that will be the AOGCC penalty.                                                                   
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked if the penalties are the same.                                                                   
                                                                                                                                
MR. MINTZ  said the  AOGCC penalty  is higher  because it  is the                                                               
fair market value  of the gas at the point  of waste, whereas the                                                               
production tax penalty  is equivalent to the tax,  which could be                                                               
10 percent of the gross value at the maximum.                                                                                   
                                                                                                                                
2:42:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ said it is not  much of a penalty, but a                                                               
"you break it you pay for it" consequence.                                                                                      
                                                                                                                                
MR.  MINTZ  said  that  is  correct  under  the  production  tax.                                                               
Currently it  is just  a double  tax.  The  AOGCC considers  it a                                                               
true penalty, because it doesn't have taxing authority.                                                                         
                                                                                                                                
2:43:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked  if the AOGCC considered  a penalty a                                                               
necessary item for conservation criteria.                                                                                       
                                                                                                                                
MR.  DICKINSON offered  that no-flare  orders are  important, and                                                               
most production operations are set up not to flare or vent gas.                                                                 
                                                                                                                                
MR. MINTZ relayed  that the AOGCC closely  regulates flaring, and                                                               
requires it  to be reported  for conservation purposes,  and that                                                               
is separate from the view of the Department of Revenue.                                                                         
                                                                                                                                
2:45:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked  if this issue is  integral to the                                                               
PPT.                                                                                                                            
                                                                                                                                
MR. DICKINSON  characterized it as  "cleaning up  something where                                                               
we spend a fair amount of time with very little net return."                                                                    
                                                                                                                                
MR. MINTZ said Section 10 also  extends the tax exemption for gas                                                               
that is  used in lease  operations to oil  that is used  in lease                                                               
operations.  He said he doesn't know how oil is used.                                                                           
                                                                                                                                
MR. DICKINSON said oil can be used as low diesel in well work.                                                                  
                                                                                                                                
2:46:34 PM                                                                                                                    
                                                                                                                                
MR. MINTZ  said Section  12 enacts the  tax credit  provisions of                                                               
the  PPT,  "and  we've  been  over  a lot  of  this."    He  said                                                               
subsection (c) on page 6 clarifies  that a credit may not be used                                                               
to reduce a person's tax below zero.                                                                                            
                                                                                                                                
CO-CHAIR SAMUELS asked that Section 12 be covered later.                                                                        
                                                                                                                                
MR.  MINTZ  said  one  substantive change  deals  with  the  rare                                                               
occurrence of  a special  penalty for failure  to file,  which is                                                               
supposed  to  be  repealed  as  redundant "and  a  trap  for  the                                                               
unwary."   He  said  laws provide  for  general civil  penalties,                                                               
including penalties  for late filing,  which can  be substantial,                                                               
he said.   One  penalty is $25  per day, and  there has  been one                                                               
case where  it added up  "to a totally  disproportionate amount."                                                               
He  said   there  is   already  a   penalty  under   the  general                                                               
administrative  provision, so  the  bill proposes  to repeal  the                                                               
special $25  per day  penalty.   He said  Section 15  addresses a                                                               
true-up filing that is required in March.                                                                                       
                                                                                                                                
2:50:27 PM                                                                                                                    
                                                                                                                                
MR. MINTZ  said Section 17  has nothing  to do with  changing the                                                               
production tax, but  it was obvious that an update  was needed to                                                               
reflect the  passage of the  constitutional budget  reserve fund.                                                               
It simply conforms the statute  on disposition of collected taxes                                                               
to the requirements of the fund, he said.                                                                                       
                                                                                                                                
MR. MINTZ said  Section 12 enacts the  various credit provisions.                                                               
He pointed  out that  subsection (e)  contains the  limitation on                                                               
use  of  credits  that  are  obtained  through  the  purchase  of                                                               
certificates.  Those  credits may not be used to  reduce the tax,                                                               
during a calendar year, more than  20 percent below what it would                                                               
otherwise be.  "That 20 percent  limitation does not apply to the                                                               
use of the producer's own credits."                                                                                             
                                                                                                                                
MR. DICKINSON stated that Co-Chair  Ramras asked about making the                                                               
credits  refundable.    He  said such  credits  could  be  called                                                               
"Alaska Bucks,"  and used in a  lease sale at a  premium.  Rather                                                               
than  have a  commitment from  a company  to reinvest,  the state                                                               
would  require  the  Alaska  Bucks  to  be  used  to  expand  the                                                               
company's acreage, "or  something like that."  He  said that even                                                               
though the  economics are the  same, whether  a check is  sent or                                                               
the  income  is  deducted,  the   point  would  be  "if  we  were                                                               
purchasing those,  you would have  to authorize that  outlay, and                                                               
again,  if we're  in a  situation...where  the companies  weren't                                                               
using credits  because prices were  very low,  you might be  in a                                                               
situation...ten years from now, if  you had the current budget of                                                               
slightly north  of $3  billion, and revenues  are at  $1 billion,                                                               
you might  be very loath to  take a significant portion  of those                                                               
and turn them  into credits."  He suggested  adding conditions to                                                               
further incentivize those uses.                                                                                                 
                                                                                                                                
2:54:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  surmised that a refundable  credit would                                                               
require the state to write a check.                                                                                             
                                                                                                                                
MR. DICKINSON said refundable means  that the state would write a                                                               
check to a person with the credit.                                                                                              
                                                                                                                                
REPRESENTATIVE  ROKEBERG  said it  would  come  from the  general                                                               
fund.                                                                                                                           
                                                                                                                                
MR. DICKINSON said there could be fund created for credits.                                                                     
                                                                                                                                
2:55:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted that the  credit could be optional or                                                               
out  of royalty  or  production  taxes to  avoid  getting into  a                                                               
deficit.   If  it were  at 90  percent, the  state would  make 10                                                               
percent, which is more than it  makes on the permanent fund.  "If                                                               
it gave  the small producers  another avenue if the  credits were                                                               
discounted to 70 percent..."                                                                                                    
                                                                                                                                
2:56:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  said, "But you'd  have to be  willing to                                                               
enter the market place to make it real."                                                                                        
                                                                                                                                
MR. DICKINSON said, "You write checks when there's a run on it."                                                                
                                                                                                                                
CO-CHAIR RAMRAS  spoke of  attaching a  premium to  the playback,                                                               
"because the large  majors are going to be  able to automatically                                                               
use,  in good  times and  bad times,  the credit  because they're                                                               
generating, even  at $20 barrel  oil, in  spite of some  of their                                                               
graphs,  I  think  they're going  to  be  generating  significant                                                               
income.  But the small guys,  the small players, it would be nice                                                               
to  see  both  a  90  percent  provision  and  also  110  percent                                                               
provision; 90 percent for cash,  and 110 percent if they're going                                                               
to   use  it   to  reinvest   into  additional   explorations  to                                                               
incentivize the small guys."                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  asked  what  the  amount  of  the  tax                                                               
credits would be, "how many qualified capital expenditures?"                                                                    
                                                                                                                                
MR.  DICKINSON  said  the  baseline  expenditures  for  the  last                                                               
several years  have been  around $1 billion  annually.   He said,                                                               
"It is our hope  that those would increase."  He  said he has not                                                               
modeled  how effective  he thinks  the  incentives will  be.   He                                                               
stated that when  Point Thompson is brought on  line, "we believe                                                               
that will more like a $3  billion figure over several years."  If                                                               
it  is  $1 billion  per  year,  there  will  be credits  of  $200                                                               
million, he said.                                                                                                               
                                                                                                                                
REPRESENTATIVE   BERKOWITZ   suggested   a  credit   that   would                                                               
differentiate between more  difficult-to-produce hydrocarbons and                                                               
the ones that  should be driven solely by market.   He said there                                                               
is little  reason to incentivize  Pt. Thompson, but there  may be                                                               
reason to incentivize more difficult resources.                                                                                 
                                                                                                                                
2:59:47 PM                                                                                                                    
                                                                                                                                
MR.  DICKINSON  said that  if  the  legislature requests  varying                                                               
credits, the  department will do  its best to craft  those rules.                                                               
He  said, "The  reason  why  we have  resisted  some attempts  to                                                               
create differentials  here is  precisely because"  companies tell                                                               
him  to incentivize  different  kinds of  resources.   "You  walk                                                               
through and every  company properly has their  niche, knows their                                                               
challenges,  and  thinks  that  a level  of  support  would  help                                                               
overcome  those challenges."   He  said the  bill will  allow for                                                               
expensive  operations   to  generate   large  credits   and  less                                                               
expensive operations  to generate  smaller credits.   In speaking                                                               
with the  governor, "we landed  on this  notion of not  trying to                                                               
pick and choose between the  activities.  We believe if companies                                                               
believe that  there's investments to  be made that  will produce,                                                               
we're  going   to  support  those."     He  added   his  personal                                                               
observation that "we are spending a  lot of time carrying out the                                                               
instructions...on making  sure that all  the conditions  are met.                                                               
Because there's lots of conditions  there.  And there's been some                                                               
complaints,  you know,  we've asked  to  prove up  each of  those                                                               
conditions.   They're  there, so  when you  work on  an audit,  I                                                               
recall in particular,  you had one well that  qualified, one well                                                               
that didn't,  how we dealt  with all the support  operations that                                                               
supported them both.   A lot of effort went  into resolving that.                                                               
I'm not sure that was, in the final analysis, a value added."                                                                   
                                                                                                                                
REPRESENTATIVE  BERKOWITZ asked  Mr. Dickinson  to point  out any                                                               
operation that resulted from the incentive.                                                                                     
                                                                                                                                
MR. DICKINSON said he said  he saw on Gavel-to-Gavel that someone                                                               
from Pioneer said that company  had "undertaken some of that work                                                               
as a  consequence of that  and was  going to undertake  work next                                                               
year, also as a consequence of that credit."                                                                                    
                                                                                                                                
3:02:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked, "Is  the reinvestment in hard assets                                                               
by a small company almost already  increased?  In other words, if                                                               
you take your tax credit and  you reinvest it in hard asset, then                                                               
you're going  to get a 20  percent tax credit on  that money that                                                               
you've  reinvested.   So you're  actually getting  over your  100                                                               
percent anyway,  aren't you?"   He added that  "in a way,  it's a                                                               
following year, but..."                                                                                                         
                                                                                                                                
MR.  DICKINSON  said,  "That's  certainly  what  we've  tried  to                                                               
establish,  is that  as  you generate  profits,  if you  reinvest                                                               
them, you  pay less  tax.   If you don't  reinvest them,  you pay                                                               
more tax.  And  so, in that sense, you're correct.   You get more                                                               
profit for investment; you get  less profit if you're paying back                                                               
to shareholders or investing elsewhere."                                                                                        
                                                                                                                                
REPRESENTATIVE SEATON  said he meant  the application  of credit,                                                               
and how the  state incentivizes credits.  He spoke  of paying 110                                                               
percent credit.   "It all automatically will  generate another 20                                                               
percent credit on the use of the money."                                                                                        
                                                                                                                                
MR. DICKINSON  said that is correct;  "if you force those  into a                                                               
market and the  market's weak, then you only get  $70 to reinvest                                                               
from your  credits, of the full  100, and I think  the notion is,                                                               
could we  support that up  to 80 or 90  or then even  think about                                                               
making it 110?"                                                                                                                 
                                                                                                                                
REPRESENTATIVE ROKEBERG  said Pioneer may have  indicated that it                                                               
undertook  its program  because  of exploration  credit under  SB
185.  He said Pioneer also received a credit on royalty relief.                                                                 
                                                                                                                                
MR.  DICKINSON  said  he  believes   there  has  been  additional                                                               
exploration due  to credits, but  the wells drilled in  the first                                                               
year may have been drilled anyway.                                                                                              
                                                                                                                                
3:05:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ said  if that  is the  only example  in                                                               
front of the  committee, "you can make the  argument that royalty                                                               
relief  is   a  much  more   effective  discretionary   tool  for                                                               
stimulating exploration  and development  than, sort of,  a broad                                                               
brush tax credit."                                                                                                              
                                                                                                                                
MR.  DICKINSON noted  the  length of  time  that various  royalty                                                               
reduction programs have  been around.  He said  the main argument                                                               
about why  the state didn't  get the  amount of drilling  that it                                                               
hoped for  under SB 185  is that it  was a five-year  program and                                                               
"folks  don't   immediately  change   their  behavior   and  come                                                               
running."    This will  make  things  more attractive  but  won't                                                               
precipitate a rush, he stated.                                                                                                  
                                                                                                                                
CO-CHAIR  RAMRAS said  he spoke  with ExxonMobil  Corporation who                                                               
broke it into three  separate fields: aggregated, non-aggregated,                                                               
and under  the PPT.  He  said, "they took the  lease expenditures                                                               
that  pass  through the  eye  of  the  needle of  the  particular                                                               
hydrocarbon  field they  were working  on.   And  they seemed  to                                                               
count  the  money  twice,  which  was  one  of  the  points  that                                                               
Representative Berkowitz made yesterday.   Which is they took the                                                               
20 percent as a  lease expense, and then they took  it again as a                                                               
capital expenditure.   And  it was  then that  I clued  into this                                                               
double  counting that  I think  you were  referring to  the other                                                               
day.  And I wonder if  you can explain that...if it's relevant to                                                               
Section 12."   He said he  didn't think there was  an opportunity                                                               
to count something as a deduction  and then count it as a capital                                                               
expense twice.                                                                                                                  
                                                                                                                                
3:08:04 PM                                                                                                                    
                                                                                                                                
MR.  DICKINSON said  he  doesn't  like to  use  the term  "double                                                               
count", since that tends to be used in a negative context.                                                                      
                                                                                                                                
CO-CHAIR RAMRAS said he is using it in a negative context.                                                                      
                                                                                                                                
MR. DICKINSON said the state  could have instead crafted the bill                                                               
such  that operating  expenses have  a 20  percent allowance  and                                                               
credits get 40 percent, and  a company can't deduct anything that                                                               
qualifies    for   a    credit   as    an   operating    expense.                                                               
"The  mathematical result  would have  been the  same."   He said                                                               
that dollars  spent on capital  expenses will receive  40 percent                                                               
of support under  the tax system, and the  operating dollars will                                                               
receive 20 percent.                                                                                                             
                                                                                                                                
CO-CHAIR RAMRAS surmised  that that would be  a 20/20/40 program,                                                               
"if  it were  straightforward like  that, 20  percent on  regular                                                               
expenditures  and 40  percent on  capital credits  if we  were to                                                               
state it  in that  regard."   He said that  means that  a company                                                               
hiring an  army of  groundskeepers to  make its  Anchorage office                                                               
beautiful,  who  aren't doing  a  thing  to discover  or  explore                                                               
hydrocarbons,  would   get  a  20  percent   operational  expense                                                               
deduction against profits.                                                                                                      
                                                                                                                                
MR. DICKINSON  said if it kept  its leases in good  shape and its                                                               
partners approved, then yes.  He  said keeping a building in good                                                               
shape does not qualify for  a lease expenditure, and he suggested                                                               
looking at the definition of a lease expenditure.                                                                               
                                                                                                                                
REPRESENTATIVE ROKEBERG  said that  was a good  point, and  it is                                                               
not clear  to the  public or  to him.   He said  it looks  like a                                                               
20/20, 20/20, or something.                                                                                                     
                                                                                                                                
MR.  DICKINSON   relayed  that  Section   21  deals   with  lease                                                               
expenditures where a company will  receive 20 percent support for                                                               
each one.  It counts as a deduction.                                                                                            
                                                                                                                                
3:11:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  there  is the  20  percent of  the                                                               
qualified capital expenditure, the  20 percent lease expenditure,                                                               
the  20 percent  of loss  carry-forward, and  the 1/72  look back                                                               
provision.                                                                                                                      
                                                                                                                                
MR. DICKINSON  said the 20  percent carry-forward credit  and the                                                               
20  percent  deduction for  expenses  are  essentially the  same.                                                               
"If, in a month,  I have, even after paying all  my costs, I have                                                               
a  20  percent...profit, then  I  will  pay  20 percent  on  that                                                               
profit.   If  I  subtract all  my costs  and  my qualified  lease                                                               
expenditures and I now have a loss  of $10 million, let's say.  I                                                               
pay no  tax that month, but  to make sure that  those outlays are                                                               
properly accounted for, I'm going to  take them in a future year,                                                               
and  the mechanism  we've  created to  do that  is,  you take  20                                                               
percent  of those,  so in  this case...$2  million and  that gets                                                               
carried forward in credit in the  future year.  So...while it may                                                               
be fair, or  it may be inaccurate to characterize  a dollar spent                                                               
as qualifying for both a credit  and a deduction, I don't believe                                                               
it's  fair  to  characterize  it  as  receiving  a  carry-forward                                                               
deduction and a regular deduction."                                                                                             
                                                                                                                                
REPRESENTATIVE BERKOWITZ surmised that  the bill has an effective                                                               
deduction rate of 60 percent.                                                                                                   
                                                                                                                                
MR. DICKINSON  said no;  the reason that  the effective  tax rate                                                               
and the tax rate in the bill are  not the same, is because of the                                                               
deductions.  "The point is,  typically what an effective tax rate                                                               
will  be is  you will  start with  some number.   There  was some                                                               
confusion the  other day  whether it was  revenue or  profit, but                                                               
let's say for gross value at  the point of production.  You start                                                               
with that,  you divide through  by the  amount of taxes  you pay,                                                               
and that  forms a ratio, and  that's what the effective  tax rate                                                               
is."                                                                                                                            
                                                                                                                                
REPRESENTATIVE BERKOWITZ said if there was  a total tax take as a                                                               
single  unitary tax  for the  state's interest,  for example,  50                                                               
percent  or 60  percent  including the  federal  rate, this  item                                                               
would be deducted one time or three or four times?                                                                              
                                                                                                                                
MR. DICKINSON  said it would  depend on  how the law  is written.                                                               
"The point is, if  you had single rate, if you  wanted to say you                                                               
take all  your revenues,  you subtract all  your costs,  and then                                                               
you pay government  61 percent and let them figure  it out.  From                                                               
the company's point  of view, what you would be  saying is that's                                                               
a  pure  tax  on  profits,  and  you  don't  get  any  kick  from                                                               
investment.   What we've chosen  to do...is an emphasis  [on] how                                                               
do you take  these dollars and how do you  create a tax advantage                                                               
to the person who decides to invest in the state."                                                                              
                                                                                                                                
3:14:56 PM                                                                                                                    
                                                                                                                                
MR.  DICKINSON  read page  12,  lines  24-26,  in regard  to  the                                                               
groundskeeper   question:  "ordinary   and  necessary   costs  of                                                               
exploring, developing, or  producing oil or gas."  He  said it is                                                               
not  the intent  to create  such a  situation [of  groundskeepers                                                               
being deductible].                                                                                                              
                                                                                                                                
CO-CHAIR RAMRAS  asked about  "a bunch  of engineers"  working on                                                               
Alaska leases in Houston.                                                                                                       
                                                                                                                                
MR. DICKINSON told him  to move ahead to page 13.   If people are                                                               
solving  problems of  getting oil  out of  the ground  in Prudhoe                                                               
Bay, "and  BP is  willing to  pay 18 percent  of their  costs and                                                               
ConocoPhillips  Alaska,  Inc.  36  percent  of  their  costs  and                                                               
ExxonMobil  Corporation  36  percent  of their  costs,  then,  in                                                               
general, we're going to say  'Yea, that probably has something to                                                               
do with Prudhoe Bay production.'"                                                                                               
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked if  they will make  that decision                                                               
based on  the other tax  rate they have  to pay, for  example, if                                                               
Texas had a higher tax rate, and then they would benefit.                                                                       
                                                                                                                                
MR.  DICKINSON  said he  supposed  that  could happen,  but,  "In                                                               
general, I  think what happens  is the various owners  are trying                                                               
to  keep costs  out;  they're making  sure  the operator  doesn't                                                               
spend costs  that aren't a useful  way of getting oil  out of the                                                               
ground."                                                                                                                        
                                                                                                                                
REPRESENTATIVE BERKOWITZ said, "Yet  strangely they can't tell us                                                               
their profits."                                                                                                                 
                                                                                                                                
3:17:33 PM                                                                                                                    
                                                                                                                                
MR.  MINTZ  said  subsection  (h) on  page  7  defines  qualified                                                               
capital expenditure that  is eligible for the  20 percent credit.                                                               
He said, "It is  important to point out that that  is a subset of                                                               
lease  expenditures."    "It  has  to start  off  being  a  lease                                                               
expenditure,  and of  course lease  expenditures  are the  things                                                               
that  are  deductible  under  Section  160  in  calculating  your                                                               
taxable net value, but then  it's a subset of lease expenditures,                                                               
which are only  that type of lease  expenditure that's considered                                                               
a capital  investment or  capital expenditure."   He said  when a                                                               
producer wants to transfer its  credit and gets the department to                                                               
issue a  certificate, the  department retains  the ability  to go                                                               
back  and  audit   the  producer.    The   deductions  for  lease                                                               
expenditures and  the credits for qualified  capital expenditures                                                               
can  be taken  advantage of  by  explorers who  are actually  not                                                               
doing  any current  production,  he said,  and  are thus  without                                                               
production  tax liability.   If  they get  a tax  certificate and                                                               
sell it to  a producer, and then later the  department finds that                                                               
there was a  problem with the claim.  "We  want the department to                                                               
be able  to recover that  deficiency back against  the explorer."                                                               
He  said  the  bill  makes  sure the  explorer  is  considered  a                                                               
producer, "that  is, a  taxpayer from  whom the  department could                                                               
then recover a tax deficiency."                                                                                                 
                                                                                                                                
3:20:22 PM                                                                                                                    
                                                                                                                                
MR.  DICKINSON  referred  to  subsection (h)  and  said  that  to                                                               
qualify as  a capital expense it  must fit three criteria:  1. it                                                               
had to be  a lease expense, 2. it would  have to capitalize under                                                               
IRS rules,  and 3. it  would not  have been previously  placed in                                                               
service.  "There's  going to be some big numbers,  but we believe                                                               
that  there's  going  to  be   things  that  really  are  capital                                                               
investments in producing in Alaska that are new to the state."                                                                  
                                                                                                                                
3:21:32 PM                                                                                                                    
                                                                                                                                
MR. MINTZ said  Sections 18 and 19 are just  technical changes to                                                               
conform language  and update syntax.   He  said Section 21  is an                                                               
important  provision  explaining  how to  calculate  net  taxable                                                               
value.   "In general, deductible  lease expenditures  include not                                                               
only production  costs but also  exploration costs."  He  said it                                                               
would cover  explorers who are performing  seismic exploration on                                                               
unleased  land.    Another possibility  of  exploration  activity                                                               
occurring on unleased  land is under the  DNR exploration license                                                               
program, he  stated.  He said  there could be wells  drilled, and                                                               
there  is a  particular  provision that  addresses the  potential                                                               
double-dipping  problem.   At the  bottom  of page  12, there  is                                                               
language that says:  lease expenditures do not  include the costs                                                               
incurred  to satisfy  the work  commitment  under an  exploration                                                               
license.   He  said when  a person  gets an  exploration license,                                                               
part  of the  consideration is  an agreement  to spend  a certain                                                               
amount  of  money  on  exploration activities,  and  if  that  is                                                               
successful,  there is  an option  to acquire  a lease.   He  said                                                               
there is no bonus  paid to the state for that.   "In our view the                                                               
money  that's  spent  under  the   work  commitment  is  sort  of                                                               
equivalent to the bonus...and not allowed to be deducted."                                                                      
                                                                                                                                
MR.  MINTZ  said  there  have   been  questions  with  regard  to                                                               
subsection  (d), which  lists costs  that  are considered  direct                                                               
costs and  deductible and those that  aren't.  He said  the lists                                                               
are examples and are not meant to be exhaustive.                                                                                
                                                                                                                                
MR. DICKINSON  said a  Limited Liability  Corporation (LLC)  is a                                                               
checker  box organization  where profits  can flow  through to  a                                                               
member subchapter  (c) corporation.  "Obviously,  particularly in                                                               
Alaska,  many LLCs  flow  through  to an  entity  that  is not  a                                                               
taxpayer; that is  one of the advantages of that  form in Alaska,                                                               
but I think  you'll find that LLC--you should not  assume that an                                                               
LLC immediately is not a taxpayer."                                                                                             
                                                                                                                                
3:26:19 PM                                                                                                                    
                                                                                                                                
MR.  DICKINSON, referring  to lines  8-12,  said if  there is  an                                                               
arbitration or lawsuit  with the state, the state  will not allow                                                               
the money spent to be deductible.   A lawsuit like an injury case                                                               
would be deductible, he said.                                                                                                   
                                                                                                                                
3:26:58 PM                                                                                                                    
                                                                                                                                
MR. MINTZ  referred to subsection  (h) on  page 15, and  said the                                                               
transitional provision  is sometimes  called the  claw back.   He                                                               
said there is  a requirement that the West Coast  price of Alaska                                                               
North Slope  oil must exceed  $40 per  barrel in order  for those                                                               
expenditures to  be deductible in a  month.  There are  a variety                                                               
of  ways to  calculate this  price, and  there are  a variety  of                                                               
publications that publish  spot prices, he noted.   He thought it                                                               
was important to  provide a general statement in the  bill so the                                                               
department could decide  how to calculate the  price if available                                                               
publications  change.    He  stated   that  the  spot  trade  may                                                               
diminish, so there  has be a fall-back  provision for determining                                                               
when the $40 per barrel threshold is met.                                                                                       
                                                                                                                                
3:28:33 PM                                                                                                                    
                                                                                                                                
MR.  MINTZ said  page 16,  subsection (k),  describes an  unusual                                                               
situation, and an  example would be the Northstar  Unit, which is                                                               
partly on  state land and  partly on federal  land.  He  said the                                                               
department  is  charged  with  specifying  reasonable  allocation                                                               
methods for expenditures on split properties.                                                                                   
                                                                                                                                
MR.  DICKINSON  said  subsection (j)  establishes  standards  for                                                               
determining  whether   there  was  a  situation   where  multiple                                                               
entities  were  formed  to  take advantage  of  the  $73  million                                                               
allowance.   It also shows  the information that can be requested                                                               
and the  standard that  the commissioner  would use  to determine                                                               
whether an entity could use that allowance.                                                                                     
                                                                                                                                
MR.  MINTZ  said  the  number  that determines  the  tax  is  the                                                               
producer's net  value of oil  and gas produced during  the month,                                                               
and the  20 percent rate is  applied to that.   The $73 allowance                                                               
is a  way of  reducing the net  value by that  amount.   He noted                                                               
that a  producer might  want to  split up a  company in  order to                                                               
take the  $73 million  allowance twice in  order to  evade taxes.                                                               
He said  he tried to  define the problem  in as general  terms as                                                               
possible to  address numerous situations and  devices that people                                                               
could come  up with to  try and exploit the  allowance provision.                                                               
He  said  the  state  can't  minimize  the  fact  that  there  is                                                               
definitely an  incentive to try  to get around  it.  He  said the                                                               
general standard in the bill  will hopefully work for any attempt                                                               
to illegally exploit the allowance provision.                                                                                   
                                                                                                                                
3:32:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  RAMRAS said  he understands  the  intent of  subsection                                                               
(j), but suggested  that it be rewritten because  he doesn't want                                                               
something "that you can drive a  truck through."  He said when he                                                               
earlier  asked  a  question  about   [the  problem  of  companies                                                               
splitting to take  advantage of the $73  million allowance], "you                                                               
were  shaking  your head  no,  and  there  was a  gentleman  from                                                               
ConocoPhillips Alaska  sitting in  the back  row who  was nodding                                                               
his head  yes."  He said  at every point, whether  exploration or                                                               
development, "everybody is  always trying to lay off  part of the                                                               
risk on to  other partners, and you can get  this thing ginned up                                                               
with a lot of partners."                                                                                                        
                                                                                                                                
3:35:17 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON  said Co-Chair  Ramras is  absolutely correct.   He                                                               
said the future of the North  Slope is in smaller entities coming                                                               
in  and  entering partnerships,  and  the  balance that  must  be                                                               
achieved  is   between  not   stopping  this   sensible  economic                                                               
evolution and  trying to  prevent entities  from dividing  up the                                                               
net value for the purposes of  the allowance.  The policy call is                                                               
which side to err on, he opined.                                                                                                
                                                                                                                                
REPRESENTATIVE BETH KERTTULA asked for  examples of what kinds of                                                               
things  would reasonably  be  expected  to be  done  by just  one                                                               
producer.                                                                                                                       
                                                                                                                                
MR. DICKINSON said  the type of entities the  department would be                                                               
concerned  about are  those that  have  no other  purpose than  a                                                               
paper ownership,  "and whose relationship with  the larger owners                                                               
was  one  that  didn't  appear   to  have  any  real  indices  of                                                               
independence  or   any  existence  other  than   simply  to  take                                                               
advantage  of the  tax credit.   In  other words,  the value  was                                                               
split.  On the other hand...if  you looked at a situation where a                                                               
new  field  was developed  and  some  partner  came and  took  22                                                               
percent of it  and 78 remained with...the major  producer.  You'd                                                               
say, 'well, clearly that happened  here on the North Slope before                                                               
this bill was passed,' so that kind of thing would be allowed."                                                                 
                                                                                                                                
3:38:23 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS asked  how the state would know, and  he gave an                                                               
example of an international exchange.   He said he spoke with the                                                               
industry about it,  and was told it was not  worth setting up the                                                               
scheme because it is not enough  money.  "To ExxonMobil it is not                                                               
that much money for them to set  up a corporation and play a game                                                               
around the  globe so that they  make an extra $15  million, which                                                               
is probably three minutes of their revenue."                                                                                    
                                                                                                                                
MR. DICKINSON said  he is less concerned that there  will be some                                                               
international deal than  with a company going  into an enterprise                                                               
and getting three legitimate partners,  but then he asked if that                                                               
is what  the state is trying  to encourage.  "My  concern is that                                                               
what we take is the base  production from the major fields that's                                                               
occurring now,  that is  what will generate  most of  the revenue                                                               
under  this, and  in fact,  there I  think we  can be  clearer if                                                               
suddenly large portions of it  start being spun off, particularly                                                               
to entities that have no existence  other than to hold that."  He                                                               
said that if  he found a small field, "it  won't be necessary, if                                                               
you will, to get three or four  entities in to make that work the                                                               
way things are supposed to work here."                                                                                          
                                                                                                                                
3:41:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA  said  the   $73  million  profit  exemption                                                               
concerns him because "we're starting to  now let the tail wag the                                                               
dog.  It seems  to me from the rumors in the  hallway that it was                                                               
a fair attempt to find a way  to try and exempt Cook Inlet fields                                                               
and  some others."   But  the provision  seems to  really benefit                                                               
others.  He suggested scrapping  the provision and coming up with                                                               
a way  to target  a tax  credit to heavy  oil, small  fields, and                                                               
maybe new fields.                                                                                                               
                                                                                                                                
MR. DICKINSON said he is not  sure he understands.  He said heavy                                                               
oil and  exploration is  one world  and Cook  Inlet is  a totally                                                               
different  world.   "The point  is, ultimately,  the credits  are                                                               
looking  at  capital  expenditures,  and  I  believe  that  is  a                                                               
distinct  discussion  from  a reduction.    The  expenditure--the                                                               
credits piece--simply doesn't  matter what entity takes  it.  The                                                               
effect is  going to be the  same.  This focuses  on entity level.                                                               
If your notion is:  do you get rid of an  entity level and simply                                                               
go  back and  focus on  activities?   Sure, that's  a choice  the                                                               
legislature could make.  Why we  had this in there and the reason                                                               
we  keep  focusing on  it  is--and  we hear  this  a  lot in  the                                                               
legislature, as well,  walking the halls--is there needs  to be a                                                               
focus on  bringing a different-sized  company in and  that's what                                                               
we're encouraging  here.  So  if what you're trying  to encourage                                                               
is dependent  on company  size, then  it needs  to be  an entity-                                                               
level encouragement."                                                                                                           
                                                                                                                                
CO-CHAIR  RAMRAS said  his concern  is an  unintended consequence                                                               
that can grow  out of something that looks practical.   "You take                                                               
five  of these  entities over  ten years  and pretty  soon you're                                                               
aggregating these $73 million units,  and now over the next five,                                                               
seven, ten years, you've got sixty  or seventy or eighty of these                                                               
$73 million units,  and you have now aggregated  $6 billion into-                                                               
you put a  20 percent credit on that-and you  now have 20 percent                                                               
of $6 billion, and harbored $1.2  billion."  He said on the other                                                               
side, the state  may have spurred exploration, but  he is worried                                                               
that the state  is on thin ice.   He said there may  be no intent                                                               
of malice.                                                                                                                      
                                                                                                                                
3:44:53 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON pointed out that if  there were 70 entities in five                                                               
years,  the legislature  would  probably  repeal this  provision,                                                               
unless it works  as intended.  He said if  the commissioner can't                                                               
enforce it, "I believe the legislature would act on it."                                                                        
                                                                                                                                
3:45:48 PM                                                                                                                    
                                                                                                                                
MR. MINTZ said Sections 22-29  deal with conservation surcharges,                                                               
which exist  in statute at  $0.03 and  $0.02 per barrel.   "These                                                               
are basically retained.   We had to make  clarification that even                                                               
though  the production  tax  now will  be paid  on  a 90  percent                                                               
monthly  basis  with a  true  up  at the  end  of  the year,  the                                                               
conservation charges would still be  paid in full every month, as                                                               
now.  One change would be that they  would be able to be taken as                                                               
credits against  the production  tax owed, as  long as  there's a                                                               
positive production tax  liability."   He said  he also conformed                                                               
the exemptions  for oil  to make it  consistent, and  it provides                                                               
that oil used in lease operations does not incur the surcharge.                                                                 
                                                                                                                                
MR. DICKINSON said  the net effect of changing  the definition of                                                               
oil is  that the amount paying  the surcharge will increase.   He                                                               
said  he will  get  the exact  numbers.   There  is  a crude  oil                                                               
topping plant that produces fuel for  use in trucks, he said, and                                                               
those barrels are  now included in the amount  against which this                                                               
fee is  chargeable.   That would  change, he  said.   Natural gas                                                               
liquids going down TAPS do not  currently pay this fee, and under                                                               
this change, they will pay the fee.                                                                                             
                                                                                                                                
3:48:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ asked  the amount  of the  conservation                                                               
surcharges.                                                                                                                     
                                                                                                                                
MR. DICKINSON said it is about $8 million per year.                                                                             
                                                                                                                                
REPRESENTATIVE BERKOWITZ  surmised that crediting it  against the                                                               
PPT would cost the state about $2 million.                                                                                      
                                                                                                                                
MR. DICKINSON  said it  would actually  be creditable  dollar for                                                               
dollar, so  it would be  the full  amount if everybody  is paying                                                               
taxes.                                                                                                                          
                                                                                                                                
REPRESENTATIVE BERKOWITZ said,  "So it's not an expense?   It's a                                                               
credit."                                                                                                                        
                                                                                                                                
MR. DICKINSON said that is correct.                                                                                             
                                                                                                                                
3:49:09 PM                                                                                                                    
                                                                                                                                
MR. MINTZ said  the next few sections add  and change definitions                                                               
regarding the  point of production.   The gross value of  oil and                                                               
gas is calculated at the point  of production, and that stays the                                                               
same,  but   the  point  of  production   changes  because  lease                                                               
expenditures  under the  PPT  are incurred  upstream.   The  main                                                               
change is that  currently gas processing plants  are considered a                                                               
downstream facility,  which means that  it is considered  to have                                                               
been produced  before it  goes through the  plant and  the liquid                                                               
hydrocarbons (ngl)  that are extracted  are treated as  gas under                                                               
the current production  tax statute.  Under the  PPT it generally                                                               
doesn't make any  difference whether something is gas  or oil, he                                                               
noted.  The  new definitions will result  in considering anything                                                               
a  gas that  is  in a  gaseous phase  when  it leaves  mechanical                                                               
separation or  gas processing, and  if it  is in a  liquid phase,                                                               
it's oil.  The impact is that  the gas process will be subject to                                                               
a deduction  and a capital investment  credit, he said.   He said                                                               
there is a  definition of gas processing now, for  the first time                                                               
in statute.  He said there  is also a definition of gas treatment                                                               
because  it is  important  to  point out  that  gas treatment  is                                                               
downstream  of  the point  of  production;  it occurs  after  gas                                                               
processing  and it  is  the process  of getting  the  gas into  a                                                               
transportable condition.                                                                                                        
                                                                                                                                
3:52:19 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON showed  "a simple diagram of how  this would work."                                                               
He said fluids--oil,  gas, and water--come out of a  well.  There                                                               
is a mechanical  separation, he said, and on the  North Slope and                                                               
Cook  Inlet there  would be  something that  looks like  oil that                                                               
goes into  a pipeline,  and there would  be something  that looks                                                               
like gas--except  for Prudhoe Bay--and those  definitions are not                                                               
controversial.  He  said, "What we are changing is  if you take a                                                               
gaseous mixture of  hydrocarbons, which is not  yet produced gas,                                                               
you  send it  to a  gas processing  plant.   And the  central gas                                                               
facility on the North Slope would  be an example of such a plant.                                                               
In  that  gas  processing  plant, you  would  typically,  through                                                               
something  like refrigeration,  you produce  a stream  of heavier                                                               
hydrocarbons  that  are going  to  be  put  in  TAPS or  used  in                                                               
Kuparuk, as I  said earlier, and that is the  point of production                                                               
for those,  what are currently gas  but what we are  now going to                                                               
call  oil, because  they  are heavier  hydrocarbons  in a  liquid                                                               
form.    The gas  processing  also  will  generate the  point  of                                                               
production  for the  gas,  in  other words,  once  you have  that                                                               
separation  between those  heavier hydrocarbons  and the  lighter                                                               
hydrocarbons.   In a  situation where you're  going to  sell that                                                               
into a pipeline,  after producing the gas you would  then go into                                                               
gas treatment, where you typically  are removing things like CO2,                                                               
getting that ready  for a gas pipeline.  The  one situation which                                                               
is  on the  very bottom  [of the  slide] is  what happens  if you                                                               
build  a plant  in which  both gas  processing and  gas treatment                                                               
occur, and  in that case, the  point of production for  gas, we'd                                                               
simply go  to the  furthest point upstream,  at which  either gas                                                               
processing ended or  gas treatment began.  And  typically we'd be                                                               
looking at the processes, and  that's what the definitions do, is                                                               
go  in  and  really  identify which  processes  you're  doing  to                                                               
extract liquid  hydrocarbons that you're  going to use  and which                                                               
processes you're  using to  just get  this gaseous  mixture ready                                                               
for sale to a pipeline."                                                                                                        
                                                                                                                                
CO-CHAIR SAMUELS said  the small oil companies right  now have to                                                               
pay the  large companies who decide  the rate.  "Right  now you'd                                                               
be able to use the credits to build your own."                                                                                  
                                                                                                                                
MR. DICKINSON  agreed; gas processing  is upstream  and therefore                                                               
it qualifies  for the credits  and deductions.  If  someone finds                                                               
gas  and decides  to build  their own  plant, they  would get  40                                                               
percent of  support.   If they  don't build  that plant,  it will                                                               
allow  freedom  in the  negotiation  process  with a  plant-owner                                                               
trying to extract a high price for the use of that plant.                                                                       
                                                                                                                                
CO-CHAIR SAMUELS  surmised that for someone  drilling and dealing                                                               
with oil, the  state still allows them to build  their own plant,                                                               
using the credits rather than paying the big three producers.                                                                   
                                                                                                                                
MR. DICKINSON concurred.                                                                                                        
                                                                                                                                
3:56:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA asked  whether "capital"  includes just  the                                                               
cost of tangible items or if it includes the cost of labor.                                                                     
                                                                                                                                
MR. DICKINSON  said it includes the  labor.  He said  he is using                                                               
the  definitions in  the tax  codes.   The total  cost has  to be                                                               
capitalized for the number of years  that the code requires.  The                                                               
code is written to require people  to capitalize, he stated.  The                                                               
federal government  will try  to push  things into  capital while                                                               
companies try to push them into operating.                                                                                      
                                                                                                                                
3:57:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA  asked about  the labor  after the  field and                                                               
the plant have been constructed.                                                                                                
                                                                                                                                
MR. DICKINSON  said once  it is  placed in  service it  no longer                                                               
qualifies.                                                                                                                      
                                                                                                                                
3:59:22 PM                                                                                                                    
                                                                                                                                
MR. MINTZ said  the next slide should be labeled  Section 34, and                                                               
it just  repeals provisions  that are superseded  by the  new tax                                                               
approach.    He  said  Section  35  provides  that  the  new  tax                                                               
provisions  would apply  on  or  after July  1,  2006.   It  also                                                               
provides that  Section 11 would  apply to  oil or gas,  no matter                                                               
when produced because it is merely clarifying current law.                                                                      
                                                                                                                                
MR. MINTZ said  Section 36 is the transition  provisions, and the                                                               
first  four are  designed to  deal with  the calendar  years that                                                               
have to  be modified to apply  to the half calendar  year of July                                                               
through  December  of  2006.     He  said  subsection  (e)  is  a                                                               
transition  provision that  recognizes  that  in July,  taxpayers                                                               
will be  filing for  oil and  gas produced in  June, and  that is                                                               
under existing  law, and it  will continue  to be applied.   This                                                               
assumes  that there  will be  enough time  for the  department to                                                               
develop  and  adopt  appropriate  regulations.   At  the  end  of                                                               
August,  taxpayers  will  have  all the  guidance  they  need  to                                                               
properly file their returns.                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked about how far  back a retroactive                                                               
tax can go.                                                                                                                     
                                                                                                                                
MR. MINTZ  said retroactive changes  have been upheld  by courts,                                                               
but generally the time span needs to be relatively short.                                                                       
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  asked  the difference  in  revenue  of                                                               
going back to January 1, instead of July 1.                                                                                     
                                                                                                                                
4:04:02 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said further details  are forthcoming but according                                                               
to his recollection that would be approximately $450 million.                                                                   
                                                                                                                                
REPRESENTATIVE GARA  said at a  25 percent  tax rate it  would be                                                               
about $700 million.                                                                                                             
                                                                                                                                
MR. DICKINSON said that sounds about right.                                                                                     
                                                                                                                                
REPRESENTATIVE GARA asked if the ELF started on January 1st.                                                                    
                                                                                                                                
MR. MINTZ  believes the 1977 changes  took effect on July  1, and                                                               
he doesn't know when the 1989 changes took effect.                                                                              
                                                                                                                                
4:05:44 PM                                                                                                                    
                                                                                                                                
MR. MINTZ said  Section 37 is the transition  provision that will                                                               
ensure that  regulations are adopted  and implemented.    He said                                                               
Section 38 is conforming language  to the captions of the various                                                               
provisions.   Section  39 includes  miscellaneous changes  in the                                                               
bill that are  not integral to the changes in  the production tax                                                               
"as such" and would take effect immediately.                                                                                    
                                                                                                                                
4:07:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG asked about requested information.                                                                      
                                                                                                                                
MR. DICKINSON said there were 72 questions from the legislature.                                                                
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  about the  modeling of  different                                                               
tax and credit rate scenarios that were requested a week ago.                                                                   
                                                                                                                                
MR. DICKINSON said he had them.                                                                                                 
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked for information on  gas production                                                               
in Cook Inlet and comparing the ELF  with the PPT,  both with and                                                               
without the $73 million allowance.   He said it is very important                                                               
to understand  the impacts of the  bill on Cook Inlet.   He asked                                                               
for information on  the Chevron-Unocal amount of that.   He wants                                                               
another  type  of Cook  Inlet  exemption  in order  to  encourage                                                               
production  in the  next decade.   He  said the  testimony showed                                                               
that the PPT would raise taxes on Cook Inlet gas.                                                                               
                                                                                                                                
4:10:05 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON cautioned that there will be assumptions.                                                                         
                                                                                                                                
4:10:38 PM                                                                                                                    
                                                                                                                                
BILL  CORBUS,  Commissioner,  Department  of  Revenue,  said  the                                                               
administration  strongly supports  the governor's  bill, HB  488.                                                               
He said  the PPT  will replace a  broken ELF-based  severance tax                                                               
and provides incentives for  development, with special incentives                                                               
for   small  explorers.     It   will  enhance   state  revenues,                                                               
particularly in times  of high oil prices.  He  said he wanted to                                                               
make  it clear  that the  governor made  policy calls  on the  20                                                               
percent  tax  rate, the  20  percent  credit  rate, and  the  $73                                                               
million  exemption.   He said  Pedro  van Meurs  was the  primary                                                               
advisor,  who was  instructed to  design  a new  tax regime  that                                                               
would accomplish  two goals:   increase  state revenues  based on                                                               
what  producers are  paying  in similar  oil  regimes around  the                                                               
world and to  increase incentives.  From August  2005 to February                                                               
2006,  Mr. van  Meurs  suggested a  20 percent  tax  rate and  15                                                               
percent tax credit plan.  His final proposal was a 25/20 ratio.                                                                 
                                                                                                                                
4:14:04 PM                                                                                                                    
                                                                                                                                
MR. CORBUS  said the  governor appreciated  those recommendations                                                               
but wanted to  tilt more towards investments, and  so reduced the                                                               
tax rate to  20 percent.  "The governor has  done a marvelous and                                                               
unexpected thing for Alaska.   He's gotten the producers to agree                                                               
to increase  their production tax by  100 percent and to  build a                                                               
gas pipeline."                                                                                                                  
                                                                                                                                
REPRESENTATIVE  BERKOWITZ said  the  legislature's  job would  be                                                               
easier with  more information made  available to them.   He asked                                                               
if the administration looked at  other systems besides a PPT, and                                                               
why those were not chosen.                                                                                                      
                                                                                                                                
MR. CORBUS  said he began  working on  the tax when  the governor                                                               
took  office, and  he did  consider fixing  the ELF  by adding  a                                                               
price  component  and a  heavy  oil  component.   It  became  too                                                               
complicated and the PPT route appeared to be preferable.                                                                        
                                                                                                                                
[HB 488 was held over]                                                                                                          
                                                                                                                                

Document Name Date/Time Subjects