Legislature(2005 - 2006)CAPITOL 124

03/07/2006 12:30 PM RESOURCES

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12:36:04 PM Start
12:36:24 PM HB488
03:23:34 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
12:36:24 PM                                                                                                                   
CO-CHAIR SAMUELS announced that the only order of business would                                                                
be the continued discussion on the proposed profit-based                                                                        
petroleum production tax (PPT).                                                                                                 
12:37:23 PM                                                                                                                   
ROBYNN  WILSON, Director,  Tax Division,  Department of  Revenue,                                                               
introduced  Dan  Dickinson  as a  consultant  to  the  governor's                                                               
office and former director of the division.                                                                                     
DAN DICKINSON,  Consultant to  Office of  the Governor,  told the                                                               
committee members  to get as  well informed  as they can  on this                                                               
issue.   The governor has  made his judgments, and  Mr. Dickinson                                                               
said he  has heard  interesting ideas from  the legislators.   He                                                               
said  he will  tell the  committee how  the policy  calls by  the                                                               
governor  are   the  correct  ones.     Regarding   direct  lease                                                               
expenditures, the  legislature has  justified concerns  about how                                                               
the division  will audit  those.    Giving substantial  weight to                                                               
industry  practice has  been questioned,  he stated,  because "it                                                               
really seems to be turning  things over to industry, not sticking                                                               
up for  the state's rights."   He said to look  at the safeguards                                                               
that are  built in  and "to look  at exactly what  we said."   He                                                               
noted Section  160(c) where "what  we have suggested  doing there                                                               
is looking at  industry practice in the  following situations: We                                                               
want  to  look  at  industry  practice  that  was  in  effect  on                                                               
December, 1, 2005,  before folks were aware of what  was going on                                                               
here,  so  the  kinds  of  deals  they  put  together  then,  and                                                               
secondly, and more important, when  industry practice was subject                                                               
to a  negotiation with working-interest  owners who were  not the                                                               
operator who  had substantial bargaining  power."  He  said three                                                               
units out of twenty on the North Slope meet that qualification.                                                                 
MR.  DICKINSON  said  the  state  will  be  looking  at  industry                                                               
practices  "where  adverse parties  negotiated  a  deal and  keep                                                               
looking at each  other with adverse economic  interests in mind,"                                                               
and the state wants to take advantage  of that.  He said it would                                                               
be great  to be  able to  audit everything, but  when he  was the                                                               
director  he spent  a  lot  more time  talking  about what  would                                                               
happen  if the  division were  cut by  15 percent.   He  said the                                                               
state  doesn't intend  to  roll over.    The built-in  safeguards                                                               
allow the practice  of looking at how the  industry defines costs                                                               
to make sense.   The state's auditing would  be internal controls                                                               
to   see  if   industry   is  following   those  agreements   and                                                               
implementing arms-length transactions, he stated.                                                                               
MR.   DICKINSON  said   the   adoption   of  royalty   settlement                                                               
methodologies is a  policy call the legislature  needs to review.                                                               
He said it makes  sense to have one set of  auditors looking at a                                                               
set of  figures versus two sets  of auditors looking at  the same                                                               
figures.  Over the years  different standards have been developed                                                               
for royalty and for tax, "but the  point is, if you go back up to                                                               
50,000 feet, are  those differences that really  create value for                                                               
any party?  And I would submit  that they don't."  He agreed that                                                               
cross checking  provides a  better result,  but in  this instance                                                               
there doesn't  need to be  two sets  of rules interpreted  by two                                                               
sets of auditors.   He said as  long as there is  the ability for                                                               
the  commissioner to  define the  rules, the  commissioner should                                                               
have the  option of allowing the  producer to use that  for their                                                               
net back for taxes.                                                                                                             
12:44:43 PM                                                                                                                   
REPRESENTATIVE  SEATON referred  to  the  language saying  "shall                                                               
give substantial weight  to", and he asked  what flexibility that                                                               
gives the commissioner.                                                                                                         
12:45:20 PM                                                                                                                   
ROBERT MINTZ,  Assistant Attorney  General, Oil, Gas,  and Mining                                                               
Section,  Department  of  Law,   said  the  provision  does  give                                                               
directions, but  substantial weight is different  from conclusive                                                               
effect.  There will still be  room for judgment and discretion in                                                               
making  these determinations,  he  stated,  but the  commissioner                                                               
would  be  expected  to  give   substantial  weight  to  industry                                                               
practice as  set out  in the  bill, "meaning  that he  can't just                                                               
ignore industry  practice and would  not be limited  to referring                                                               
to industry  practice, but  that would be  a substantial  part of                                                               
the input to the determinations,  and presumably there would have                                                               
to  be  a  good  reason  to do  something  contrary  to  industry                                                               
12:46:27 PM                                                                                                                   
REPRESENTATIVE  SEATON  said  he  is trying  to  figure  out  why                                                               
statute  should restrict  the commissioner  to develop  a set  of                                                               
criteria.    He suggested  there  would  be more  flexibility  in                                                               
allowing the  commissioner to consider industry  practice instead                                                               
of directing him or her to use it.   He also suggested it sets up                                                               
the state for a future legal battle.                                                                                            
12:47:03 PM                                                                                                                   
MR. MINTZ said it is a policy call.                                                                                             
12:47:14 PM                                                                                                                   
MR. DICKINSON said  he was just trying to  acknowledge that there                                                               
are ways for  the state to "leverage work that  is now being done                                                               
to its  advantage.  And  so what  we are trying  to do is  say we                                                               
will look  at that where  those conditions  exist."  He  said Mr.                                                               
Mintz is right in that  the legislature might decide the language                                                               
is  too strong.    There  are savings  out  there  that could  be                                                               
captured if the state uses industry reports, he stated.                                                                         
12:48:27 PM                                                                                                                   
MR. DICKINSON  noted "downstream  costs" are  now audited  by DNR                                                               
under the  standards set  out in  the royalty  leases and  by DOR                                                               
under the standards set out in  statute and regulations.  He said                                                               
the differences  don't add  value.  Under  the leases,  there are                                                               
four measures and the state can  select the highest of those.  He                                                               
said  it  is not  clear  whether  that  is  a monthly  or  yearly                                                               
exercise,  "but basically  they  can  look at  the  value of  the                                                               
crude, they  can look at the  sales price of the  crude, they can                                                               
look at what others  sold it for, or they can  look at the posted                                                               
price."   In the  royalty settlement  agreements that  closed out                                                               
the Amerada Hess  litigation, the state looked at  the lease well                                                               
before there  were transparent  or spot  market prices,  and said                                                               
"we're going to go to a  single value" based on a formula derived                                                               
from  spot prices  of Alaska  North Slope  (ANS) or  a basket  of                                                               
crude.     The  state  decided  that   markets  are  sufficiently                                                               
transparent so  that using that  technique as the  starting place                                                               
for  royalty  net-back,  gives  the   state  the  same  kinds  of                                                               
protections  that were  being built  into the  lease, he  stated.                                                               
Under current statute the DOR has  two options.  "It could either                                                               
tax on  the value of  the sale - what  someone got for  that oil.                                                               
Or,  if that  sale  doesn't represent  market  conditions on  the                                                               
prevailing value  for like-kind  crude, again, what  we're saying                                                               
is, if we look at transparent  markets and if this is working for                                                               
the  Department of  Natural Resources  in valuing  our crude,  we                                                               
ought to be able to take that  same standard and have it apply in                                                               
valuing the crude for tax purposes."   If DNR goes to a different                                                               
standard,  "then  we   might  not  adopt  that   anymore."    The                                                               
commissioner would have to write  regulations saying what happens                                                               
when  the  methodology doesn't  work.    He  said the  system  is                                                               
working and resources should not be used to re-create that work.                                                                
12:51:15 PM                                                                                                                   
MR.  DICKINSON referenced  Daniel  Johnston's presentation  which                                                               
suggested  a minimum  value,  "you shouldn't  do  worse than  you                                                               
could, so maybe you should  leave the ELF (economic limit factor)                                                               
in place  and just have  the higher  of, similar to  the Canadian                                                               
system.  "   Mr. Dickinson  countered that  the state  always has                                                               
royalties,  which  generate  half  of the  state's  general  fund                                                               
income.   "If a severance tax  goes to zero, it's  very different                                                               
than in Newfoundland  when the tax formula goes  to zero, because                                                               
Newfoundland has no other way  of getting revenues from the oil."                                                               
He  said Alaska  also has  property  taxes and  income taxes,  so                                                               
building in  a minimum [tax] doesn't  make any sense to  him.  He                                                               
said Alaska has a minimum tax, but  when applied to the ELF it is                                                               
"no minimum  at all."   "If  we're trying  to make  these credits                                                               
effective, and we  have this minimum ELF tax, would  it be before                                                               
or after the  application of the credits?" he asked.   He said he                                                               
is not sure  he understands how a $73  million tax-free allowance                                                               
works in with a minimum tax.   If the legislature wants a minimum                                                               
tax, "some consideration  should be given to  those mechanics." A                                                               
minimum tax would be more  regressive, he stated.  Mr. Johnston's                                                               
idea of  different [tax] regimes  for different  locations sounds                                                               
attractive, he said, and that is what  he tried to do in the bill                                                               
by  taxing profitability,  which considers  costs.   Mr. Johnston                                                               
also  promoted progressivity,  but  "this bill  makes the  Alaska                                                               
system much  more progressive than it  was."  So the  question is                                                               
whether to  make the tax  system hyper-progressive and  make this                                                               
element more price sensitive, he said.                                                                                          
12:55:34 PM                                                                                                                   
REPRESENTATIVE GARA  said the legislature received  an opinion on                                                               
the Cuno case  [Cuno et al, v. DaimlerChrysler Inc.  et al.], and                                                           
asked if  that has an effect  on the differential taxes  for Cook                                                               
Inlet, heavy oil, or legacy fields, for example.                                                                                
12:56:08 PM                                                                                                                   
MR.  MINTZ said  the Cuno  case  dealt with  the Commerce  Clause                                                             
limitations  on  state  taxation  and  the  constitutionality  of                                                               
investment tax credits,  not on differential taxes  for heavy oil                                                               
or different  geographical areas.  The  issue "may be more  of an                                                               
equal protection  issue, whether  there are  other constitutional                                                               
limitations on  the ability of  the legislature to  tax different                                                               
taxpayers or different properties differently."   He said that in                                                               
general  courts have  treated the  taxing power  very generously,                                                               
using the lowest type of scrutiny,  which is if it has legitimate                                                               
state interest.   He said he  doesn't expect that there  would be                                                               
an equal  protection problem  when there  is an  evident rational                                                               
reason for differing taxes.                                                                                                     
12:57:41 PM                                                                                                                   
CO-CHAIR RAMRAS provided  an example of buying a new  car and not                                                               
buying one that  is just better than the old  one, but buying one                                                               
that fits current  needs.  "To say that this  is better than what                                                               
we have,  I think there  is already  broad consensus in  the room                                                               
... but I think this is a matter  of trying to get a perfect fit:                                                               
one that doesn't  leave much money on the table  and doesn't make                                                               
the producers or their incentives go away."                                                                                     
12:59:21 PM                                                                                                                   
MR. DICKINSON said  there is a balance  between progressivity and                                                               
other aspects of  the tax.  If prices went  to $200 [per barrel],                                                               
the state, clearly, should have been  taking more, he stated.  He                                                               
added that the  important aspect is the incentive  piece "and the                                                               
conditions under  which the  investments are  going to  be made."                                                               
He told  the committee to make  a judgment and strike  a balance.                                                               
He said  the balance  that he  came up  with struck  that balance                                                               
between the incentives and getting enough money for the state.                                                                  
1:00:57 PM                                                                                                                    
CO-CHAIR RAMRAS requested a summary  document for the legislature                                                               
so it  can draw its  own conclusions.  He  said he wants  to know                                                               
how many  barrels are flowing per  day and how much  of a decline                                                               
there is, "and  what would happen if we moved  rates up one point                                                               
and  we moved  credits up  one  or down  one ..."  using a  table                                                               
instead of graphs.                                                                                                              
1:02:49 PM                                                                                                                    
MR. DICKINSON said,  "If you tell us what you  want on that page,                                                               
we'll  put  it  on that  page."    He  said  he has  gotten  many                                                               
requests.   "We publish every  six months -  you can go  and look                                                               
and you  can see  how many  barrels are flowing  and what  we are                                                               
projecting for  their decline, and we  now even say how  much off                                                               
were our  projections."   However, he said  he can't  predict the                                                               
outcome of a tax change.                                                                                                        
1:03:34 PM                                                                                                                    
CO-CHAIR  RAMRAS  noted that  changing  tax  credits is  entirely                                                               
different than changing taxes, and may have more effect.                                                                        
1:03:46 PM                                                                                                                    
REPRESENTATIVE SEATON  highlighted that DOR has  only discussed a                                                               
single tax rate.   He then asked why this  is called progressive,                                                               
and why  Mr. Dickinson  used the  term hyper-progressive  for any                                                               
tax escalator.                                                                                                                  
1:04:16 PM                                                                                                                    
MR. DICKINSON explained  that the term progressive  is being used                                                               
to describe a situation in  which when one variable changes there                                                               
is another variable that changes more rapidly.                                                                                  
1:04:41 PM                                                                                                                    
REPRESENTATIVE  SEATON  said  he  knows what  a  progressive  tax                                                               
system is, but questioned Mr.  Dickinson calling a fixed tax rate                                                               
a progressive system.                                                                                                           
1:05:11 PM                                                                                                                    
MS.  WILSON explained  that for  income taxes,  progressive means                                                               
that as  net income increases  so does the  tax rate.   She noted                                                               
people using the term "progressive  tax rate" with respect to the                                                               
price of  oil.  She questioned,  "What happens if you've  got one                                                               
taxpayer that's  really doing what  we want and investing  in the                                                               
state, those  costs, when it comes  to setting the tax  rate, are                                                               
sort of ignored."  Ms.  Wilson highlighted information from Pedro                                                               
van Meurs that  specifies that many countries  have a progressive                                                               
tax  rate  with  respect  to  the rate  of  production.    It  is                                                               
important to know the definition of progressive, she stated.                                                                    
1:07:01 PM                                                                                                                    
MR. DICKINSON  said he [questioned  whether] as the price  of oil                                                               
increases,  the  state's share  increases.    In that  sense,  he                                                               
added,  a 20  percent  tax rate  is more  progressive  than a  19                                                               
percent rate, "because  of the slope of the line."   He said that                                                               
by taxing  net profits, "you're  increasing the  progressivity in                                                               
the sense of  the early profits, the early  revenues get absorbed                                                               
by costs."                                                                                                                      
1:08:23 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ said  he still has not  heard the answer                                                               
on what  is meant by a  progressive tax.   If it is a  linear, or                                                               
straight-line, function,  it is  a flat tax.   A  progressive tax                                                               
has  a  curve,  and  he  asked  how  the  administration  defines                                                               
progressive,  as well  as profit,  revenue, and  production.   He                                                               
said  these are  all terms  that  seem to  be interchanged,  thus                                                               
making it difficult to follow these discussions.                                                                                
1:09:16 PM                                                                                                                    
MR. DICKINSON said:                                                                                                             
     In    general,   when    folks   are    talking   about                                                                    
     progressivity, they're  talking about  the relationship                                                                    
     between  either the  price or  the  revenue, which  are                                                                    
     generally going be related, as  compared to state take,                                                                    
     and what  the relationship  is, one against  the other.                                                                    
     When ... if you are  simply looking at percent of state                                                                    
     take,  for example,  you  illustrate the  regressivity,                                                                    
     because you  say, gee,  ... as the  price goes  up, the                                                                    
     state's take falls.   If you are looking  at the amount                                                                    
     that's taken  as the price  goes up, the  state's take,                                                                    
     as  total  dollars,  is  increasing.    It's  just  the                                                                    
     percentage  of  the total  is  decreasing.   So  you're                                                                    
     absolutely right  that we have not  been disciplined on                                                                    
     those terms  when we're looking at  any specific graph,                                                                    
     the  person  looking  at it  may  know  precisely  what                                                                    
     they're talking  about and ... on  several occasions it                                                                    
     has   been   clear  to   me   that   there  have   been                                                                    
     conversations in  which one  person was  thinking about                                                                    
     it  one way  and the  person they  were talking  to was                                                                    
     thinking about it differently.                                                                                             
REPRESENTATIVE  BERKOWITZ  then  requested  that  those  speaking                                                               
should define the terms when using them.                                                                                        
1:10:45 PM                                                                                                                    
REPRESENTATIVE  LEDOUX  asked  if  Mr. Dickinson  used  the  term                                                               
"progressive tax" to mean "proportionate tax".                                                                                  
1:11:15 PM                                                                                                                    
MR. DICKINSON said he is not familiar with that term's usage.                                                                   
MS. WILSON  said question  number 1  has been  addressed already,                                                               
but  she has  added a  table showing  the amount  of expenditures                                                               
subject to  the transitional adjustment.   It is about  a billion                                                               
dollars  a year  in investment.   She  presented historical  data                                                               
through 2004  that can  be extrapolated  to show  exploration for                                                               
2005 of  about $94 million  and development  of $1 billion.   For                                                               
the first half  of 2006, "those numbers would be  $47 million for                                                               
exploration, $500 million for development."                                                                                     
1:13:56 PM                                                                                                                    
MR. DICKINSON said,  "We have done some work on  the 2005 capital                                                               
costs, so the extrapolation isn't just an average."                                                                             
1:14:16 PM                                                                                                                    
REPRESENTATIVE ROKEBERG  asked if it includes  actual figures for                                                               
all exploration and development oil firms in the state.                                                                         
1:14:24 PM                                                                                                                    
MS. WILSON  answered that it  includes the main  three producers.                                                               
Answering a question about other  tax regimes with progressivity,                                                               
she said it is common around the world.                                                                                         
1:15:07 PM                                                                                                                    
REPRESENTATIVE    BERKOWITZ   asked    how   she    is   defining                                                               
CO-CHAIR SAMUELS said the taxes are explained for each country.                                                                 
1:15:31 PM                                                                                                                    
MS. WILSON  said the question  that she  was asked to  answer did                                                               
not include asking for a  definition of progressivity, "so it was                                                               
answered generally  to show  you some of  the different  types of                                                               
progressive structures around the world."                                                                                       
1:15:45 PM                                                                                                                    
REPRESENTATIVE   BERKOWITZ  said   someone  must   have  had   an                                                               
understanding of what  the term meant when  putting together this                                                               
chart.  He asked for that understanding.                                                                                        
MR.  DICKINSON said  Pedro  van Meurs  assembled  the table,  and                                                               
noted that  the figures "are  indices that are tied  generally to                                                               
profit-sharing,  occasionally to  price  sensitivity, so  they're                                                               
looking at the kinds of features  we talked about which are going                                                               
to  drive the  higher  revenues  or the  higher  profit and  some                                                               
aspect of the tax system driven by those."                                                                                      
1:16:32 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ  asked if he  can assume that  the chart                                                               
represents  any  tax  system  whereby as  profit  or  royalty  or                                                               
"whatever it  is" goes up,  the percentage of the  take increases                                                               
as well.                                                                                                                        
1:16:54 PM                                                                                                                    
MR. DICKINSON  said he will let  the chart speak for  itself, but                                                               
he will check to see if that assumption is correct.                                                                             
REPRESENTATIVE BERKOWITZ said the  chart doesn't speak for itself                                                               
very clearly.                                                                                                                   
1:17:27 PM]                                                                                                                   
REPRESENTATIVE CRAWFORD  asked if  the chart's  deep-water region                                                               
represents Trinidad and Tobago or "the Gulf."                                                                                   
MS. WILSON said deep water would be part of Trinidad and Tobago.                                                                
1:18:08 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  if "progressive"  means that  there                                                               
are more  dollars generated,  "and we  don't know  whether that's                                                               
based on  production or  price ... it's  just absolute  number of                                                               
1:18:43 PM                                                                                                                    
MR.  DICKINSON  said he  is  "pretty  sure"  that there  is  some                                                               
feature of  the tax systems  listed on  the chart "that  if there                                                               
was a  linear projection would go  one way, and ...  some of them                                                               
might be that you add, let's  say, an extra percentage point when                                                               
the price  goes above  x, but  another one might  say you  add on                                                               
another traunch of, you know, you  make payments or you don't get                                                               
... you  add another  traunch of  payments on,  so ...  you can't                                                               
have this  phenomenon where your  percentage is  increasing while                                                               
your take is decreasing or vice versa."                                                                                         
1:19:30 PM                                                                                                                    
REPRESENTATIVE   GATTO  asked   if  is   it  possible   [for  the                                                               
tax/credit] to  be recessive  and progressive  at the  same time,                                                               
"because most  of us are  looking at  the end result  rather than                                                               
the mechanism that reached the end result."                                                                                     
MR. DICKINSON  said if  the terms  are defined  differently, "you                                                               
can be  regressive in  relation to one  thing and  progressive in                                                               
relation to another."                                                                                                           
1:20:07 PM                                                                                                                    
REPRESENTATIVE  GATTO   said,  "If  progressive  is   linear  and                                                               
regressive is not linear ...  it's hard to get information that's                                                               
useful without taking [a] class - it's just conversation."                                                                      
1:20:24 PM                                                                                                                    
MR. DICKINSON said linear depends on what is being plotted.                                                                     
1:21:12 PM                                                                                                                    
REPRESENTATIVE ROKEBERG said if the tax  rate is too high, then a                                                               
progressive system can become regressive too.                                                                                   
1:21:35 PM                                                                                                                    
MS.  WILSON referred  to question  11 and  the table  on page  4,                                                               
which shows expenses versus credits in the last two years.                                                                      
1:22:13 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ asked  if is  there any  way to  access                                                               
whether  those projects  that took  advantage  of the  incentives                                                               
would have taken place anyway.                                                                                                  
1:22:22 PM                                                                                                                    
MR.  DICKINSON suggested  determining that  with interviews.   He                                                               
recalled testimony  from Pioneer that the  credits were critical,                                                               
although he  opined that some  of the projects drilled  the first                                                               
year  of  the  credit  would   have  occurred  even  without  the                                                               
1:22:44 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ suggested  that the  incentives in  the                                                               
bill should be targeted to provide the maximum benefit.                                                                         
MR. DICKINSON  said there have  been informal  conversations with                                                               
explorers.   He  recalled  being  told that  the  credit is  very                                                               
useful, but  ultimately opinions varies,  and it is  difficult to                                                               
1:24:08 PM                                                                                                                    
MS.  WILSON  said these  things  are  difficult to  interpret  in                                                               
retrospect.   She then turned to  question 18 which is  in regard                                                               
to  relying  on  outside  expertise and  whether  outside  advice                                                               
resulted in  any changes to  the legislation.  She  answered that                                                               
the  bill  reflects  discussions  with counsel  that  took  place                                                               
during the drafting  process.  She said the advice  was not given                                                               
in a formal manner.                                                                                                             
1:25:25 PM                                                                                                                    
REPRESENTATIVE SEATON asked  about question 11 and  if the tables                                                               
on the  top of  page 4 show  that the state  had $104  million in                                                               
expenses and about a 30 percent  tax credit already paid on those                                                               
expenses on that development.                                                                                                   
1:26:00 PM                                                                                                                    
MS.  WILSON  said  that  is  correct;  of  the  $104  million  in                                                               
expenses,  there were  33 claimed  credits based  on that.   That                                                               
particular statute  offers two different  rates, she said,  so it                                                               
is not a clear percentage.                                                                                                      
REPRESENTATIVE SEATON asked if those  are "the same expenses that                                                               
would  be claimed  in  the transitional  for  another 20  percent                                                               
1:26:36 PM                                                                                                                    
MS.  WILSON   answered  that  they   would  qualify   as  capital                                                               
expenditures  as defined  in the  definition section.   She  said                                                               
that just as  current capital expenditures are subject  to both a                                                               
deduction and the  credit, it is true that  those taxpayers would                                                               
have claimed a  credit and then claim a  transition deduction, as                                                               
well.   "In  this table,  I've  addressed the  credits that  were                                                               
claimed,  which is  what was  available then,  and they  would be                                                               
subject   to  the   transitional   deduction,   in  effect,   the                                                               
depreciation for  the transition.   So  it is  subject to  both a                                                               
credit and a deduction," she explained.                                                                                         
1:27:31 PM                                                                                                                    
REPRESENTATIVE  SEATON  surmised  that the  transition  provision                                                               
does  not  allow  a  credit   for  capital,  but  only  allows  a                                                               
MS. WILSON said that is correct - it is a deduction.                                                                            
1:27:49 PM                                                                                                                    
REPRESENTATIVE ROKEBERG asked Mr. Mintz  about question 18 and if                                                               
it  is  the policy  to  ask  the  governor's  office to  ask  the                                                               
Alaska's   congressional    delegation   to    support   remedial                                                               
legislation to overcome the Cuno  v. DaimlerChrysler case and any                                                             
issues that may arise about apportionment  of tax.  He said he is                                                               
referring  to the  March 1,  2006, letter  from Marvin  Kirschner                                                               
that  raises  two  issues:  the Supreme  Court's  ruling  on  the                                                               
legality of  subsidized tax incentives,  and the  introduction of                                                               
HR 2471 and  SB 1066 in Congress  to ameliorate it.   He said Mr.                                                               
Kirschner  addressed the  issue of  the validity  of a  state tax                                                               
imposed  on a  foreign  corporation in  regards  to the  Commerce                                                               
Clause not  allowing discrimination against  interstate commerce.                                                               
He stated  that there may be  a need for remedial  legislation in                                                               
order to deal with the bill.                                                                                                    
1:30:00 PM                                                                                                                    
MR. MINTZ said  he doesn't know the governor's  policy on seeking                                                               
remedial legislation,  but there  may not be  a need  because the                                                               
case is  before the United  States Supreme  Court.  Even  if it's                                                               
vacated,  the U.S.  Court of  Appeals has  extended the  Commerce                                                               
Clause  to tax  types not  previously thought  to be  problematic                                                               
from the  standpoint of  that clause.   "The Cuno  case basically                                                             
held  that investment  tax  credits  in a  state  income tax  are                                                               
discriminatory  against interstate  commerce,"  he  said, and  it                                                               
would seem to apply to the tax  credits in the bill.  However, it                                                               
doesn't necessarily  apply because there is  a difference between                                                               
income tax  and production tax.   Every state will have  the same                                                               
issue.   He cited  a case  with Montana's  coal severance  tax in                                                               
which  the Supreme  Court  ruled "there's  really  no problem  in                                                               
terms  of apportionment  or discrimination  for  a severance  tax                                                               
because the severance  has to take place only in  the state where                                                               
the  resource is  located."   The court  upheld the  property tax                                                               
exemption  in  the  Cuno  case,  he noted.    There  are  several                                                             
possible outcomes, and if it  invalidates the tax credits in this                                                               
bill, there are ways to seek a congressional remedy.                                                                            
1:33:49 PM                                                                                                                    
REPRESENTATIVE ROKEBERG  said Mr. Kirschner also  equates the PPT                                                               
with a  value-added tax.   These issues  need to be  addressed as                                                               
this legislation moves forward, he stated.                                                                                      
1:34:45 PM                                                                                                                    
MS.  WILSON moved  on to  question 24,  which asks  what standard                                                               
will  be used  to determine  whether oil  or gas  is of  pipeline                                                               
quality  under the  definition of  "gross value  at the  point of                                                               
production."  Current statute taxes  the gross value at the point                                                               
of production to  ensure that the costs  of production downstream                                                               
of the  well would not  be deductible in calculating  the taxable                                                               
value of  oil and gas,  rather taxable value would  be calculated                                                               
at the point  that production is complete.  She  said that in the                                                               
case of oil,  gross value at the point of  production was defined                                                               
as  the value  of oil  where it  is metered  in the  condition of                                                               
pipeline  quality--in   good,  merchantable  condition.     "This                                                               
definition   essentially    adopts   commercial    standards   of                                                               
marketability for  oil.   HB 488  and SB  305 would  simplify and                                                               
shorten the definition of gross  value at the point of production                                                               
for oil  but does not  materially change  it.  The  definition of                                                               
oil is broadened to include  liquid hydrocarbons recovered by gas                                                               
processing in the case of  leases or property whose production is                                                               
subject to gas processing," she said.   For gas, the bill and the                                                               
existing  statute do  not use  the phrase  "pipeline quality"  or                                                               
"good and  merchantable condition,"  but the definition  of gross                                                               
value at  the point of  production is interpreted  by regulations                                                               
15  AAC 55.900(a)(6)(B)  and (C).    "The new  bills retain  this                                                               
concept,  but  in  effect,  expands  separation  to  include  gas                                                               
processing  so  that  in  case  of  leases  or  properties  whose                                                               
production is subject to gas  processing, the point of production                                                               
for gas  recovered by  gas processing  is the  point where  it is                                                               
metered downstream of the processing," she explained.                                                                           
1:37:27 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ said,  "It seems to me  that gross value                                                               
at  the  point  production  is  not a  fixed  definition  and  is                                                               
something that  could be subject to  change based on a  series of                                                               
criteria listed,  primarily in section 2  and 3 of Section  20 on                                                               
page 11.   I was wondering  how that could affect  the definition                                                               
of gross value at the point of production."                                                                                     
1:38:08 PM                                                                                                                    
MR. MINTZ  said Section 20  really doesn't purport to  change the                                                               
definition,  but it  provides options  for  different methods  to                                                               
calculate the gross value for  purposes of simplification.  Gross                                                               
value at  the point of  production is defined in  the definitions                                                               
and  it is  also  addressed in  existing  AS 43.55.150(a),  which                                                               
refers to the net-back principle for calculating gross value.                                                                   
1:39:04 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ said definitions  are normally fixed and                                                               
objective, but Section  20 allows the definition  to mean royalty                                                               
value,  a  formula  proscribed  by  the  department,  or  another                                                               
formula.   He  added that  the  terms are  central for  assessing                                                               
value and they could mean any number of things.                                                                                 
1:39:45 PM                                                                                                                    
MR.  MINTZ  said  Section  31,  page 19,  of  the  bill  has  the                                                               
definition of gross  value at the point of production.   He said,                                                               
however, that  it is  true that  a calculation  can come  up with                                                               
somewhat different figures,  "and, of course, it's  always been a                                                               
fruitful  area   for  controversy   between  taxpayers   and  the                                                               
department in  terms of  getting to  the right  number.   But the                                                               
underlying definition is not something that varies."                                                                            
1:40:29 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ asked  if the  change in  definition is                                                               
critical to the PPT or part of the cleanup.                                                                                     
MR.  MINTZ said  it is  not critical  to the  PPT itself,  but it                                                               
isn't merely  cleanup either.   It is  there to reflect  a policy                                                               
choice, "mainly  as to  promoting or  improving the  economics of                                                               
gas processing  to facilitate smaller  producers on  getting into                                                               
North Slope development."                                                                                                       
1:41:15 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ asked about possible alternatives.                                                                     
MR. MINTZ said it  could have been left as is,  changed to an "ad                                                               
hoc method  of ... incentivizing  ... improving the  economics of                                                               
gas processing," or  changed to some other method.   He said this                                                               
"isn't a  situation where current  definitions are broken,  but I                                                               
think there is some clarity  that's been added to the definitions                                                               
that should  be helpful.   He said it  is "not really  central to                                                               
the basic change in the taxation."                                                                                              
1:42:10 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ  asked  for a  better  description,  in                                                               
writing, of the policy debate behind the policy change.                                                                         
MR. DICKINSON said his presentation will cover the choices.                                                                     
REPRESENTATIVE  SEATON  referred  to  hydrocarbons  recovered  in                                                               
cases  of   leases  in  which   production  is  subject   to  gas                                                               
processing,  and  asked  if that  definition  of  gas  processing                                                               
includes Prudhoe  Bay "where gas  comes out  ... [and] it  is all                                                               
injected, there's no sale of that."                                                                                             
1:43:25 PM                                                                                                                    
MR. MINTZ said re-injected gas and  gas used in operations is tax                                                               
exempt and considered not produced.                                                                                             
1:43:53 PM                                                                                                                    
REPRESENTATIVE SEATON  said he  is referring to  gas that  is re-                                                               
injected, and  asked if  "subject to  gas processing"  means that                                                               
those gas  liquids would not  be considered  to be oil  until the                                                               
gas is processed and sold.                                                                                                      
1:44:36 PM                                                                                                                    
MR.  MINTZ said,  "The  gas that  comes out  of  the central  gas                                                               
facility,  the  gas  processing   facility,  it's  a  little  bit                                                               
paradoxical.   If it's metered after  that point, it has  gone to                                                               
point of production, but because  of the exemption for gas that's                                                               
re-injected, it's not considered produced."                                                                                     
REPRESENTATIVE  SEATON  asked if,  in  that  case, this  oil,  or                                                               
liquid hydrocarbons, would not be defined as oil.                                                                               
MR.  MINTZ said  it  would  still be  oil,  but  if those  liquid                                                               
hydrocarbons are used in the  operation of the lease or property,                                                               
they would be tax exempt under this bill.                                                                                       
1:45:51 PM                                                                                                                    
MR. DICKINSON  said he struggled  with that issue five  years ago                                                               
and put into the regulations the  following:  a facility may be a                                                               
gas  processing plant  with respect  to certain  of its  products                                                               
even if  it's not a  gas processing  plant with respect  to other                                                               
REPRESENTATIVE CRAWFORD  said that  the language says  that those                                                               
liquid hydrocarbons  are taxed the same  as oil, and he  asked if                                                               
oil is taxed at different levels with regard to the value of it.                                                                
1:47:18 PM                                                                                                                    
MR. DICKINSON said, "Those can  differ in value widely...what you                                                               
will typically find  in the Lower 48 is a  plant that when, let's                                                               
say,  ethane suddenly  becomes more  valuable as  ethane, they'll                                                               
pull out  the ethane and sell  it.  And when  suddenly it becomes                                                               
more valuable  for its BTU value,  they'll leave it in  the gas."                                                               
But on the North Slope, he said,  there is nothing to do with the                                                               
1:48:15 PM                                                                                                                    
REPRESENTATIVE CRAWFORD  said, "So that 45,000  barrels of liquid                                                               
hydrocarbons,  we call  it oil  and that's  the proper  value ...                                                               
it's not more  expensive at the point  of sale, and we  tax it at                                                               
the same rate as oil."                                                                                                          
1:48:41 PM                                                                                                                    
MR. DICKINSON said under the  current system, the state values it                                                               
like  oil but  taxes  it like  gas.   "You  dump  them into  TAPS                                                               
[Trans-Alaska Pipeline  System], they get commingled  in with the                                                               
stream as  they move down TAPS."  He said some people  will argue                                                               
that, because those  are so volatile, most of the  losses in TAPS                                                               
are from those natural gas  liquids (NGLs), so they haven't added                                                               
that  much  value.   But  purchasers  of  the  oil will  know  it                                                               
includes  a percentage  of volatile  hydrocarbons, and  the state                                                               
takes the prevailing  value and adds that value to  both the NGLs                                                               
and the  oil.  "We net  it back" all  the way up to  pump station                                                               
[x],  and  at that  point  the  state  takes  the oil  "times  15                                                               
percent, times  the oil  ELF, and  we have  some gas  here, we'll                                                               
take that times 10 percent, times  the gas ELF.  But the starting                                                               
value for both  will have been calculated through  the exact same                                                               
net-back process.   So we value it  like oil, but we  tax it like                                                               
1:50:14 PM                                                                                                                    
MS. WILSON  continued with question  25 regarding  the historical                                                               
analysis  of the  results of  valuation methodologies  adopted by                                                               
the  Department  of  Revenue,  Department  of  Natural  Resources                                                               
(under all agreements)  and the [US] Department  of the Interior.                                                               
She said  that although  much is parallel  in the  calculation of                                                               
gross value  at the  wellhead between the  royalty and  tax, many                                                               
differences have  developed.  Both start  with destination value,                                                               
she  said, and  then  tankering, pipeline,  and  other costs  are                                                               
subtracted  to  arrive  at  a  wellhead  value.    She  said  DOR                                                               
valuation comes from  statute and regulation.   The DNR valuation                                                               
for  royalty  comes from  lease  contracts,  supplemented by  the                                                               
royalty  settlement  agreements,  which are  different  for  each                                                               
large  North Slope  producer, she  added.   For DOR,  destination                                                               
value is the price for which the  oil was sold or when the oil is                                                               
not sold for market price, the  prevailing value or spot price is                                                               
used.  For  DNR, that value is  a formula driven by the  ANS or a                                                               
basket of similar crude, she said.                                                                                              
1:51:55 PM                                                                                                                    
MR. DICKINSON noted that it is the ANS spot price.                                                                              
MS.  WILSON said  each  method  subtracts marine  transportation,                                                               
TAPS,  feeder-line, and  other  costs.   She  explained that  DOR                                                               
deducts the costs  specific to each taxpayer,  while for royalty,                                                               
some  of  the  [reimbursable  services  agreement]  RSAs  have  a                                                               
formulaic deduction,  and others  use the royalty  payer's actual                                                               
costs.   She said DNR subtracts  field costs for most  DO1 leases                                                               
on the North  Slope while DOR does not.   The differences between                                                               
wellhead  values narrow  across  time, she  added.   The  average                                                               
difference  for  2000  through  2005 was  3.9  percent,  but  the                                                               
average difference  for the last  12 months was 6.1  percent, she                                                               
stated.    "The  critical  point  is that  the  DOR  uses  actual                                                               
proceeds  and   only  resorts  to   prevailing  value   when  the                                                               
conditions of zero to  zero F are met, that is,  sort of the non-                                                               
arms'-length transaction.  Thereby  taxing on the higher proceeds                                                               
or prevailing value.  For each  of the three producers DNR uses a                                                               
single-destination  formula  based  on spot  prices  rather  than                                                               
actual proceeds," she concluded.                                                                                                
MS. WILSON  moved on to  question 34,  which relates to  how many                                                               
investment credits  were sold  under SB 185  and one  ensures the                                                               
person  who  holds  the  credit,   not  the  original  recipient,                                                               
receives the credit.   She noted that only two  credits have been                                                               
issued and sold to another party.                                                                                               
1:54:19 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ asked if the  two credits were sold at a                                                               
discount or at full value.                                                                                                      
MR. DICKINSON said they were sold at a discount.                                                                                
REPRESENTATIVE BERKOWITZ asked how much of a discount.                                                                          
1:54:33 PM                                                                                                                    
MR. DICKINSON recalled that it was about 90 percent.                                                                            
1:54:45 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ asked  if  smaller  producers sold  the                                                               
credits to bigger producers.                                                                                                    
MR. DICKINSON said that is correct.                                                                                             
CO-CHAIR SAMUELS  asked if  it is  always public  information and                                                               
not a private transaction.                                                                                                      
1:55:14 PM                                                                                                                    
MR. DICKINSON  said, "We would know  about it ... but  that would                                                               
not make it public information."                                                                                                
REPRESENTATIVE ROKEBERG said  he thought there was  a registry of                                                               
1:55:54 PM                                                                                                                    
MS WILSON said  the division obtains a  waiver of confidentiality                                                               
from the  seller, which allows  the division to confirm  that the                                                               
credit  exists to  a prospective  purchaser, and  once sold,  the                                                               
division  makes  the  transfer  and  issues  the  credit  to  the                                                               
1:57:07 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ asked if there  is a tax consequence for                                                               
the transaction.                                                                                                                
1:57:27 PM                                                                                                                    
MR. DICKINSON said he believes  the purchase would be an ordinary                                                               
and  necessary way  of going  about business,  "you could  either                                                               
have the  deduction for the  tax or the deduction  for purchasing                                                               
the  credit.   I  believe you'll  get a  smaller  deduction as  a                                                               
consequence of it.  Again, for  the seller, that would show up as                                                               
income to them.  They could not  use it otherwise, so ... it will                                                               
be  a transaction  just  like any  other ...  to  carry on  their                                                               
1:58:16 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ  said, "So,  if  the  purchaser buys  a                                                               
dollar's  worth of  credit for  90 cents,  is that  viewed as  10                                                               
cents of income?"                                                                                                               
MS. WILSON  said, "I would  expect that  there would be  a dollar                                                               
claimed  as  income and  90  cents  written  off as  a  deduction                                                               
against that."                                                                                                                  
1:58:48 PM                                                                                                                    
REPRESENTATIVE ROKEBERG asked if  the bill contemplates using the                                                               
same methodology for the registration  of the certificates and if                                                               
the discounts can be published or if they are proprietary.                                                                      
1:59:16 PM                                                                                                                    
MR. DICKINSON said anything could  be published in a disguised or                                                               
generalized form.                                                                                                               
REPRESENTATIVE  ROKEBERG   asked  about  the  state   helping  to                                                               
generate a market [for the credits].                                                                                            
1:59:55 PM                                                                                                                    
MR. DICKINSON  said that would  be similar to the  salmon pricing                                                               
report,  which presents  the  price for  which  things are  being                                                               
sold.  He said the department could do so, given that direction.                                                                
2:00:07 PM                                                                                                                    
REPRESENTATIVE OLSON asked about question 25 and Cook Inlet.                                                                    
2:00:24 PM                                                                                                                    
MS. WILSON  said that information  will be included in  the final                                                               
packet.  She  then turned to question 40  regarding whether other                                                               
nations with a  net-profit system have the 90  percent payment of                                                               
taxes with  the sure-up  provision the  following year,  and what                                                               
the  economic impact  of this  change  is.   She said  net-profit                                                               
systems work on the basis  of three different concepts, including                                                               
monthly  payments  without  an annual  true-up,  yearly  payments                                                               
without monthly payments, and yearly  payments based on a yearly-                                                               
return with  monthly payments on  account.  The  monthly payments                                                               
could  be based  on  estimates for  a month  or  based on  actual                                                               
information  from  the  previous   month.    She  explained  that                                                               
corporate  income  tax style  procedures  are  when payments  are                                                               
based on taxes  paid in the prior year, which  is used in Norway.                                                               
The 90  percent rule proposed  in HB  488 is unique,  she stated.                                                               
The overall economic  impact would depend on  the taxpayers' cost                                                               
estimates for each month.   She said she expects underpayments in                                                               
some months and overpayments in  other months.  However, she said                                                               
she does  not expect any  material net economic impact  from this                                                               
aspect of the bill.                                                                                                             
2:02:08 PM                                                                                                                    
MS. WILSON continued with question 66 and its answer:                                                                           
     The discussion of oil field  needs, i.e. not to deplete                                                                    
     the  gas  pressure,  did  not  recognize  the  CO2  re-                                                                    
     injection.  How will  that lengthen  the field  life(s)                                                                    
     and at what volumes, i.e. how will it affect taxes?                                                                        
     At Prudhoe Bay,  about 8.5 billion cubic feet  of gas a                                                                    
     day  is   reinjected  into   the  field   for  pressure                                                                    
     maintenance.   After stripping out  certain hydrocarbon                                                                    
     liquids,  CO2  is  reinjected   along  with  the  other                                                                    
     hydrocarbons (and   non-hydrocarbons).  When  an export                                                                    
     line  is built  on the  North  Slope, the  CO2 will  be                                                                    
     stripped  (in  "gas  treatment"),  and  there  is  some                                                                    
     question about what will happen with that CO2.                                                                             
2:02:47 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ  asked  if  someone from  DNR  will  be                                                               
available to explain such answers.                                                                                              
CO-CHAIR SAMUELS offered to speak  with the commissioner's office                                                               
regarding such a request.                                                                                                       
2:03:08 PM                                                                                                                    
MR.  DICKINSON  emphasized  that  the   main  point  is  that  no                                                               
independent  CO2 injection  is occurring  now, which  would be  a                                                               
consequence of the gas line.                                                                                                    
REPRESENTATIVE  BERKOWITZ  commented,   "One  of  the  collateral                                                               
points is  that DNR has been  conspicuous by its absence  at this                                                               
CO-CHAIR  SAMUELS said  that  he invites  Mr.  Dickinson to  come                                                               
before  the  committee  and  any  complaints  [regarding  who  is                                                               
present to answer questions] can be directed to him.                                                                            
2:04:07 PM                                                                                                                    
MS. WILSON moved on to question 67 and its answer:                                                                              
     What happens if  the "Big Three" sell  off their assets                                                                    
     to  20 smaller  companies?   Will  the significant  tax                                                                    
     benefits ever be realized?                                                                                                 
     Assume  20  new companies  suddenly  showed  up on  the                                                                    
     North Slope  and each   qualified  for the  $73 million                                                                    
     dollar allowance.   A total of $1.4  billion in profits                                                                    
     would be  sheltered from taxes. If  these companies had                                                                    
     simply  purchased their  way in,  then  taxes would  be                                                                    
     lower  by $280  million  (20 percent  of $1.4  billion)                                                                    
     than they  would be otherwise.   At current  prices, or                                                                    
     say even at  $40 oil, this could be  a material portion                                                                    
     (though not all) of the tax.                                                                                               
     If that is  the future of the North Slope  and the sell                                                                    
     off  was for  business  purposes,  the Legislature  may                                                                    
     choose to act and make  it less attractive to new firms                                                                    
     coming in.  If these  were tax-motivated sales, we hope                                                                    
     the powers of the commissioner  that are built into the                                                                    
     bill would prevent the new  entrants from using the $73                                                                    
     million allowance.                                                                                                         
2:05:08 PM                                                                                                                    
REPRESENTATIVE LEDOUX inquired  as to the built-in  powers of the                                                               
commissioner that would  prevent the new entrants  from using the                                                               
$73 million allowance.                                                                                                          
2:05:19 PM                                                                                                                    
MS.  WILSON  specified  that  the   bill  contemplates  that  the                                                               
department will  qualify recipients of the  $73 million allowance                                                               
on a yearly basis.                                                                                                              
MR.  DICKINSON directed  the committee's  attention  to page  16,                                                               
subsection (j), which sets forth the powers of the commissioner.                                                                
MS. WILSON  clarified, "And  so it  is upon  written application,                                                               
and it's done on a calendar year basis."                                                                                        
MR. DICKINSON  pointed out  that the  language specifies  that it                                                               
includes  any   information  the  department  may   require,  and                                                               
therefore its relevance is a determination of the commissioner.                                                                 
2:06:11 PM                                                                                                                    
MS.   WILSON  moved   on  to   question  73:     "Will   the  new                                                               
confidentiality provisions  extend to  or have  an effect  on any                                                               
other taxes  besides the  production tax?"   She began  by noting                                                               
that  the general  confidentiality requirements  in AS  43.05.230                                                               
covers  all  of  the  taxes.     The  confidentiality  provisions                                                               
included in HB 488 are what  she characterized as an extra detail                                                               
specific to production taxes.                                                                                                   
     The new  confidentiality language added by  secs. 4 and                                                                    
     16 of the bill applies  only to information relating to                                                                    
     the oil and gas production  tax, not other taxes.  This                                                                    
     is because:                                                                                                                
          (1)  AS 43.55.040(1) addresses information                                                                            
     "necessary to compute  the amount of the  tax," and the                                                                    
     phrase  "the  tax"  is  used  throughout  AS  43.55  as                                                                    
     referring only to the production tax; and                                                                                  
          (2)  AS 43.55.040(1) deals only with information                                                                      
     obtained  from  persons  "engaged  in  production,"  or                                                                    
     their agents, and with purchasers  "of oil or gas," and                                                                    
     with owners of a "royalty interest in oil or gas."                                                                         
2:07:25 PM                                                                                                                    
MS. WILSON continued with question 77 and its answer:                                                                           
     How much gas  was flared so as to  trigger taxes and/or                                                                    
     penalties in recent years?                                                                                                 
     During FY 2005, 351,000 Mcf  of gas was flared that was                                                                    
     considered  gross taxable  production.   Of that,  only                                                                    
     120,000 Mcf  was from  fields with  a positive  ELF and                                                                    
     subject to tax.  During  the same period 31,000 Mcf was                                                                    
     flared  and considered  waste and  subject to  both tax                                                                    
     and penalty.                                                                                                               
2:07:59 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ asked if there is a value for that.                                                                    
2:08:06 PM                                                                                                                    
MR. DICKINSON  answered that he didn't  have it with him,  but he                                                               
recalled that the regulations for  prevailing value establishes a                                                               
ratio to  oil value.   He  estimated that it  would be  $3-$6 per                                                               
REPRESENTATIVE BERKOWITZ surmised then that it's between                                                                        
MR. DICKINSON specified that it's the gross value and then 10                                                                   
percent of that would be taken.  As alluded to earlier, this                                                                    
isn't shaping behavior.                                                                                                         
2:09:04 PM                                                                                                                    
MS. WILSON read the following questions and answers:                                                                            
     80.  When  the 1989  ELF  change  was enacted,  was  it                                                                    
     retroactive and were there transition provisions?                                                                          
     The 1989  ELF changes were made  retroactive to January                                                                    
     1,  1989, and  applied to  oil produced  after December                                                                    
     31,  1988.   There was  a transition  provision to  the                                                                    
     effect that tax payable as  a result of the retroactive                                                                    
     changes would  be due on  the 20th day of  the calendar                                                                    
     month following  the effective date  of the Act.   (The                                                                    
     effective date of the Act was August 6, 1989.)                                                                             
2:09:38 PM                                                                                                                    
     82. Under  the new gas  and oil definitions,  what will                                                                    
     the net change  to the  spill fee be?   In other words,                                                                    
     looking at  FY 2005, how  much, if  any (a) oil  did we                                                                    
     tax for  its use in  production operations and  (b) how                                                                    
     many NGLS were put in TAPS?                                                                                                
     During FY 2005, tax  was collected on 1,222,400 barrels                                                                    
     of crude   oil used  in production operations.   During                                                                    
     FY  2005, 16,445,000 barrels of NGLs were put in TAPS.                                                                     
2:10:10 PM                                                                                                                    
     83.  For sales  of  credits by  the smaller  interests,                                                                    
     estimate  the  price at  which  those  credits will  no                                                                    
     longer have a market among the big three?                                                                                  
     Credits  may  be  used  in  the  year  of  expenditure,                                                                    
     carried  forward  to  following years,  or  transferred                                                                    
     (they  are  fungible).    If  transferred,  the  credit                                                                    
     cannot lower a  severance tax rate below  80 percent of                                                                    
     what it would  otherwise be [AS   43.55.024(e)].  These                                                                    
     credits will  have market value  that would  not exceed                                                                    
     20  percent  of their  face  value  ($1,000 in  capital                                                                    
     expenditures  would   save  $200  in   State  severance                                                                    
     taxes).   A company generating  them but unable  to use                                                                    
     them would  face a choice -  sell them or use  them the                                                                    
     following year (if they have  taxable income).  Use the                                                                    
     next  year reduces  the  value of  the  credits due  to                                                                    
     discount rate.   Oil companies  typically try to  use a                                                                    
     15  percent discount  rate but  will  often settle  for                                                                    
     less, say  10 percent.   This  means, all  other things                                                                    
     equal, they  would be willing  to sell a  $1,000 credit                                                                    
     ($5,000  capital  expenditures)  for $900  (10  percent                                                                    
     discount rate)  or more.   Conversely,  another company                                                                    
     would be  willing to pay up  to $999 for the  credit to                                                                    
     save $1,000 in State severance tax.                                                                                        
     If  we assume  a billion  in spending,  assume that  10                                                                    
     percent  of that  was for  little companies  that would                                                                    
     want to sell their credits,  so $200 million in credits                                                                    
     are for sale.  With  our 20 percent limit, that implies                                                                    
     that  if the  big three  had  a billion  dollar in  tax                                                                    
     obligations, that market could  absorb all the credits.                                                                    
     As our  fiscal note shows, if  the price of oil  is $40                                                                    
     [$60] or above,  all of the credits would  be usable in                                                                    
     the immediate  year.  If  oil falls below $40,  then we                                                                    
     expect that the credits  would be fully utilized within                                                                    
     two  or three  years.   While the  time-value of  money                                                                    
     means that  those certificates would be  discounted, we                                                                    
     believe   that   the   certificates  would   still   be                                                                    
2:12:28 PM                                                                                                                    
     84. If aggregation at Prudhoe  Bay had been implemented                                                                    
     on July  1, 2001 [the  start of the claw  back period],                                                                    
     how  much more  would the  State have  received between                                                                    
     then and the actual aggregation date?                                                                                      
     The  State  would   have  received  $430.4M  additional                                                                    
MS. WILSON drew attention to the table included with question 84                                                                
on page 9 of the question and answers.  The table assumes that                                                                  
all taxpayers are paying under the aggregated ELF.                                                                              
2:13:08 PM                                                                                                                    
     85. Why  are the status  quo lines in the  three graphs                                                                    
     presented by  Ms. Wilson flat  once the  forecast price                                                                    
     effect is  adjusted for?   Wouldn't  falling production                                                                    
     and ELF move those down?                                                                                                   
      The status quo drops from $378 mm in 2009 to $291 mm                                                                      
      in 2012.  It looks flat because of the scale on the                                                                       
2:13:34 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ  asked if  Ms. Wilson has  matrixes with                                                               
numbers in them that could be made available to the committee.                                                                  
2:13:45 PM                                                                                                                    
MS. WILSON replied  yes.  She related he belief  that question 85                                                               
references  the  three  charts in  her  presentation  before  the                                                               
committee the week before last.                                                                                                 
2:14:00 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG asked  if the  actual numbers  have been                                                               
2:14:14 PM                                                                                                                    
MS.  WILSON  specified that  the  department  is working  on  the                                                               
numbers and the modeling.                                                                                                       
2:14:47 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ asked if the  model will be available to                                                               
the [committee/legislature].                                                                                                    
2:14:54 PM                                                                                                                    
MS.   WILSON  replied   no,  noting   that  the   model  contains                                                               
confidential  taxpayer information  nor  is it  readable by  more                                                               
than a few individuals.                                                                                                         
2:15:19 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ  questioned  why  a  model  would  have                                                               
confidential  taxpayer information.   He  then indicated  that it                                                               
would seem up  to the legislature to determine  whether the model                                                               
is user friendly or not.                                                                                                        
2:15:35 PM                                                                                                                    
MS. WILSON  commented that the  model is so user  unfriendly that                                                               
she doesn't even  use it.  She opined that  the commissioner will                                                               
provide the chair with a letter on this matter.                                                                                 
2:15:59 PM                                                                                                                    
CO-CHAIR SAMUELS  opined that  generally speaking  the department                                                               
has  done a  fairly good  job  providing the  committee with  the                                                               
information it has requested.                                                                                                   
MS.  WILSON  said that  she  has  attempted  to provide  as  much                                                               
information  as possible.   However,  since  modeling takes  some                                                               
time,  other information  has been  provided [while  the modeling                                                               
2:16:37 PM                                                                                                                    
MS. WILSON continued with the following questions and answers:                                                                  
     86. What  will the actual  cost to the investor  be for                                                                    
     these  upstream  investments  and  what  is  the  total                                                                    
     government  underwriting, state  and  federal, all  tax                                                                    
     types included.   Is it  different for  large companies                                                                    
     and small companies?                                                                                                       
     After state  and federal tax,  the investor  would bear                                                                    
     about 38 percent of the  marginal capital.  There is no                                                                    
     reason  to think  it would  differ appreciably  between                                                                    
     large and small investors.                                                                                                 
2:17:20 PM                                                                                                                    
     87. Lord  Browne famously said  two years ago  that any                                                                    
     profits  over  $20  a barrel  were  being  returned  to                                                                    
     shareholders as  they weren't needed in  BP's business.                                                                    
     What tax  rate, credit rate  would be needed to  have a                                                                    
     cross  over  [unspecified  period] at  $20  [presumably                                                                    
     With a  20 percent credit,  it would take a tax rate of                                                                    
     about 51 percent to affect a crossover at $20 Brent.                                                                       
2:17:49 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ said  he would like to know  some of the                                                               
assumptions  that lay  behind that  determination.   He  recalled                                                               
that under the current 20/20,  the crossover point would be about                                                               
$26 or  $27 and thus he  surmised that [the tax  rate] would have                                                               
to reach about 51 percent in order to have a crossover point.                                                                   
MS. WILSON offered to expand on the answer in the final document                                                                
with the assumptions.                                                                                                           
2:18:13 PM                                                                                                                    
MS. WILSON continued with questions 88 and 89 and their answers:                                                                
     88. Please  explain how  the conservation  surcharge is                                                                    
     affected by oil price and  what affect this bill has on                                                                    
     the surcharge.                                                                                                             
     a. The  conservation surcharge is  a 3 cent  per barrel                                                                    
     charge  on all  oil produced  less royalty  barrels, so                                                                    
     therefore it is not sensitive to price.                                                                                    
     b.  There  will  be  changes in  the  quantity  of  oil                                                                    
     subject  to   both  production  tax   and  conservation                                                                    
     surcharges  under  the  bill.     One  change  will  be                                                                    
     positive, one  negative.  The  positive change  is that                                                                    
     natural  gas liquids  extracted by  gas processing  and                                                                    
     blended in the  TAPS stream that are now  taxed as gas,                                                                    
     will be  treated as oil  under the bill.   The negative                                                                    
     change is  that oil  that is  used in  lease operations                                                                    
     will not  be taxed  or subject  to surcharge  under the                                                                    
     bill.  Oil  may   be  used  to  make   fuel  for  lease                                                                    
     operations  and  perhaps   used  for  other  production                                                                    
     purposes.   The overall result is  an expected increase                                                                    
     of  the total  surcharge amount  of $444,000  per year,                                                                    
     based on FY 2005 amounts.  (See Question 82.)                                                                              
     The   bill  should   not  affect   the  assessment   or                                                                    
     collection of  the surcharge, other than  the quantity-                                                                    
     of-oil  effects described  above.   Any surcharge  paid                                                                    
     will  be  allowed  to be  credited  against  production                                                                    
     taxes, but  that would  only reduce  the amount  of tax                                                                    
     collected, not the amount of surcharges collected.                                                                         
2:19:51 PM                                                                                                                    
     89. Why are we including gas in the PPT calculation?                                                                       
     The bill  includes gas in the  PPT calculations because                                                                    
     it is  a stand-alone bill.   The bill does  not require                                                                    
     implicitly or  explicitly that a Stranded  Gas Contract                                                                    
     be subsequently concluded.  Therefore,  a PPT law would                                                                    
     be entirely functional in case  a Stranded Gas Contract                                                                    
     is  not presented  to the  Legislature or  in case  the                                                                    
     Legislature rejects such a Contract.                                                                                       
     The ELF system  for gas is "broken" just as  the ELF is                                                                    
     "broken"  for oil.    The gas  ELF  does not  encourage                                                                    
     reinvestment and it is not sensitive to price.                                                                             
     It  should be  noted that  under high  gas prices,  the                                                                    
     Alaska State take for  gas would increase significantly                                                                    
     relative to the  status quo.  This  would be beneficial                                                                    
     in  case significant  gas reserves  would be  developed                                                                    
     outside the scope of the Stranded Gas Development Act.                                                                     
     The inclusion of  gas in the PPT is  therefore a strong                                                                    
     incentive  for producers  to  conclude  a Stranded  Gas                                                                    
     Contract  that  is in  the  interest  of the  State  of                                                                    
     Alaska.    Including  gas  in   the  PPT  enhances  the                                                                    
     bargaining position  of the State  for a  good Stranded                                                                    
     Gas Contract.                                                                                                              
2:21:09 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ  highlighted that the economics  for gas                                                               
and oil are  different, and therefore inquired as to  why the tax                                                               
is the same.                                                                                                                    
2:21:26 PM                                                                                                                    
MS.  WILSON  specified  that  one of  the  principal  reasons  is                                                               
related to  the problem of allocating  cost to both oil  and gas,                                                               
and therefore this legislation attempts  to balance the differing                                                               
aspects and  provide some simplification.   Ms. Wilson  said that                                                               
although to do  accounting to allocate equipment to  both oil and                                                               
gas can  be done, it  was a policy  choice not  to do so  in this                                                               
2:22:09 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ asked if  other jurisdictions treat [oil                                                               
and gas] identically.                                                                                                           
MR.  DICKINSON  said  that  oil and  gas  is  frequently  treated                                                               
differently.   In further  response to  Representative Berkowitz,                                                               
Mr. Dickinson said that he  couldn't say that other jurisdictions                                                               
treat [oil  and gas]  identical in all  aspects.   However, there                                                               
are  jurisdictions   that  treat   capital  credits   [the  same]                                                               
irrespective of  whether its oil or  gas.  He offered  to provide                                                               
further information on this to the committee.                                                                                   
2:22:56 PM                                                                                                                    
CO-CHAIR RAMRAS drew attention to  question 1 and the bright line                                                               
in   regard  to   the  cost   allocations  for   exploration  and                                                               
development.  He  then inquired as why there is  such a disparity                                                               
in those amounts.   He opined that much of what  is desired is to                                                               
spur  exploration  and  then  [allow]   economics  to  drive  the                                                               
development.    He   also  inquired  as  to   the  definition  of                                                               
exploration and development within the legislation.                                                                             
2:24:14 PM                                                                                                                    
MS. WILSON  pointed out  that the internal  revenue code  draws a                                                               
clear line between exploration and  the intangible billing costs,                                                               
which   include   development,    well   drilling,   et   cetera.                                                               
Therefore, she  suspected that federal  rules should  be reviewed                                                               
in order to get the breakdown.                                                                                                  
2:24:59 PM                                                                                                                    
MR.  DICKINSON  said  there  is   no  definition  of  [the  terms                                                               
exploration  and development].    He explained  that  there is  a                                                               
development in  which the  producer is  discussed and  from which                                                               
there  is expansion  in order  that  the language  applies to  an                                                               
explorer also.   Mr.  Dickinson noted that  over the  years, much                                                               
energy  was spent  in attempts  to determine  whether delineation                                                               
wells were production or exploration.   The decision was that the                                                               
aforementioned doesn't matter.                                                                                                  
2:25:34 PM                                                                                                                    
CO-CHAIR  RAMRAS questioned  whether [finds]  in an  existing oil                                                               
patch  are  considered  exploration  or  development.    He  then                                                               
recalled  that [the  legislature] is  supposed to  be encouraging                                                               
frontier  exploration  and  keeping  that  separate  from  legacy                                                               
fields.     Co-Chair   Ramras  asked   whether  exploration   and                                                               
development should be  distinguished or does DOR want  them to be                                                               
kept together.                                                                                                                  
2:27:07 PM                                                                                                                    
MR.   DICKINSON  answered   first  by   acknowledging  that   the                                                               
legislature  is  free  to  decide this  matter.    He  encouraged                                                               
everyone to think  about why frontier exploration  is better than                                                               
other means of  obtaining oil.  If a player  has leased land with                                                               
facilities that are under utilized,  the question becomes whether                                                               
a different fiscal  system should be created than  for a frontier                                                               
explorer.   The question then  further becomes where to  draw the                                                               
line, he  said.   The administration would  advise that  no gains                                                               
are made by  attempting to determine whether  [dollars spent] are                                                               
exploration dollars or production [development] dollars.                                                                        
CO-CHAIR RAMRAS specified that he  would like to have definitions                                                               
of   the  following   terms:     development,  exploration,   and                                                               
production.     Co-Chair  Ramras  said,  "To   some  extent  BP's                                                               
development  dollars will  be when  it's good  economics, but  it                                                               
feels  like to  me -  part of  what we're  charged with  - is  to                                                               
encourage and  incentivize exploration."  The  aforementioned, he                                                               
said, are different activities.                                                                                                 
2:29:20 PM                                                                                                                    
MR. DICKINSON  acknowledged that everyone's dollars  are based on                                                               
economics.   He clarified that his  point is that there  are many                                                               
ways to achieve  getting oil into the pipeline,  and the question                                                               
is in regard  to how much energy should be  expended in regard to                                                               
determining the economics of certain situations.                                                                                
2:29:54 PM                                                                                                                    
CO-CHAIR RAMRAS related that one  of the central messages he took                                                               
from  Mr. Johnston's  testimony  yesterday was  that taxes  don't                                                               
matter, but credits  do.  If the aforementioned  is correct, then                                                               
he   would  estimate   the  ratio   of  exploration   dollars  to                                                               
development dollars to be 40:60.   Co-Chair Ramras opined that in                                                               
spite of the credits, the economics  are either there or not when                                                               
taking an  existing field to  exploit it using new  technology to                                                               
extract more hydrocarbons.                                                                                                      
MR. DICKINSON suggested that the  committee consider the costs of                                                               
the exploration well that discovered  Prudhoe Bay versus the tens                                                               
of billions  of dollars that  have been spent to  develop Prudhoe                                                               
Bay.  He then suggested the  committee think about a situation in                                                               
which  a developer  sinks four  wells  and finds  one 50  million                                                               
barrel  accumulation.    In   the  aforementioned  scenario,  the                                                               
developer's costs will  be much higher in relation  to the amount                                                               
of  production.    In  some   sense,  [a  developer]  would  like                                                               
exploration costs to  be as low, in relation to  what is spent on                                                               
total development, as possible.                                                                                                 
2:32:06 PM                                                                                                                    
CO-CHAIR    RAMRAS   related    his   understanding    that   the                                                               
aforementioned  examples are  precisely the  argument for  making                                                               
the  exploration   credits  much  higher  than   the  development                                                               
credits.  Co-Chair Ramras indicated  that all would agree that 20                                                               
percent   is  appropriate   for  development   credits,  but   he                                                               
highlighted his understanding that  Mr. Dickinson had just argued                                                               
that exploration credits should be 50 percent.                                                                                  
MR.  DICKINSON   replied  that  such   is  the   philosophy  [the                                                               
administration] articulated  and to which the  legislature agreed                                                               
under SB  185.  He  acknowledged that an argument  for additional                                                               
focus  on exploration  can be  made,  but [the  administration's]                                                               
point is that  a focus on all  aspects of getting the  oil out of                                                               
the ground will  yield a better result.  "As  a policy matter, we                                                               
think it's  good to support  it through the  full cycle and  as a                                                               
practical  matter maybe  I'm  over-focusing on  this,  as an  ex-                                                               
bureaucrat, is  creating these valueless distinctions  which then                                                               
everyone gets  to spend their time  arguing about.  And  you step                                                               
back ... and  you go what was  that all about?  It  seems, to us,                                                               
not a useful exercise," he explained.                                                                                           
2:33:39 PM                                                                                                                    
REPRESENTATIVE CRAWFORD  related that  it has been  suggested and                                                               
seems  to be  the  will  of many  that  [the legislature]  should                                                               
incentivize wildcatting.  He said he  didn't know how the need to                                                               
incentivize wildcatters  could be more clear  because wildcatting                                                               
isn't related to the economics of a particular field.                                                                           
2:34:44 PM                                                                                                                    
MS.  WILSON  commented that  she  agrees  with incentivizing  all                                                               
production.   However, under this  legislation the  credits under                                                               
[AS  43.55].025  are  an  alternative   credit  and  for  certain                                                               
exploration costs provide a 40 percent credit.                                                                                  
2:35:26 PM                                                                                                                    
REPRESENTATIVE  SEATON  surmised  then  that  the  PPT  looks  to                                                               
incentivize   anything,  including   wildcatting,   that  is   an                                                               
expenditure to produce more oil and fill the pipeline.                                                                          
MR.  DICKINSON agreed  with  Representative Seaton's  assessment.                                                               
He said that he also  agreed with earlier comments regarding that                                                               
it's more effective  to intervene earlier.  "The point  is if you                                                               
are making  the switch from net  to gross and you  are financing,                                                               
if you will,  through a high marginal rate, it  makes sense, from                                                               
our  point of  view,  to give  the credits  also  across all  the                                                               
production, legacy fields, new fields," he clarified.                                                                           
2:37:11 PM                                                                                                                    
The committee took an at-ease from 2:38 p.m. to 2:46 p.m.                                                                       
2:46:56 PM                                                                                                                    
MR.  DICKINSON   then  turned  the  members'   attention  to  his                                                               
PowerPoint presentation  entitled, "Point  of Production  for Oil                                                               
and Gas."   He began with  slide 2, which addresses  the question                                                               
of why it matters whether something  is called oil or gas.  Under                                                               
the current rules  gas is taxed at  10 percent and is  taxed on a                                                               
gas ELF, which only uses the  amount of production from the well.                                                               
However, oil is taxed at 15  percent times an ELF, which includes                                                               
well  productivity  and  a  field size  factor.    Mr.  Dickinson                                                               
highlighted  that state  statute includes  the principle  of free                                                               
use  of gas  for production  operations.   He explained  that the                                                               
notion is that since oil is  of higher value and gas is available                                                               
for fuel,  it can be used  to power the operations.   Presumably,                                                               
that  shows up  as  more  oil production.    He  noted that  post                                                               
production use of gas is  taxable.  Mr. Dickinson emphasized that                                                               
it  matters [whether  something is  referred  to as  oil or  gas]                                                               
because there is a conservation  surcharge of $.03-$.05, which is                                                               
levied on  every barrel of  oil, but  not gas.   Therefore, there                                                               
are  several  tax  implications regarding  whether  something  is                                                               
referred to as oil or gas.                                                                                                      
MR. DICKINSON,  continuing on with  slide 3, said that  under the                                                               
proposed rules [whether  something is referred to as  oil or gas]                                                               
won't make nearly as much difference.                                                                                           
2:50:04 PM                                                                                                                    
MR. DICKINSON pointed  out that both oil or gas  will be taxed at                                                               
20 percent of  the net.  Furthermore, the  proposed rules propose                                                               
the free use of  gas and oil for production purposes.   of the 20                                                               
oil and gas  states with significant production,  about 7 provide                                                               
the free  use of gas and  oil whereas the remaining  14 only deal                                                               
with  the  free use  of  gas.    He  explained that  because  the                                                               
conservation  surcharge is  creditable  against  the tax  itself,                                                               
from  the taxpayer's  point of  view  the conservation  surcharge                                                               
doesn't matter as  much.  Mr. Dickinson related  that perhaps oil                                                               
and gas  should be referred  to as produced  hydrocarbons because                                                               
the distinction between oil and gas is minimal.                                                                                 
MR.  DICKINSON moved  on to  slide  4, which  specifies that  the                                                               
distinction between  oil and gas  is important because  the point                                                               
of  production for  gas  is driven  by the  point  at which  it's                                                               
finally separated from  oil.  He reminded the  committee that for                                                               
oil there is  no real change [created by this  legislation].  The                                                               
aforementioned  leads  to slide  5  regarding  why the  point  of                                                               
production matters.   He explained  that under the  current rules                                                               
the  costs incurred  downstream of  the point  of production  are                                                               
deductible for calculating  production tax.  "The  state bears no                                                               
costs upstream  of the  point of production,"  he specified.   He                                                               
then related  that the same  effect holds true for  royalty, save                                                               
for the defined field cost allowance.                                                                                           
2:53:48 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  related  his understanding  that  these                                                               
changes don't have anything to do with the royalty calculation.                                                                 
MR. DICKINSON  agreed, adding  that the  only reason  the royalty                                                               
calculation has  been brought  into this is  that there  are some                                                               
parallels.  In fact, the  commissioner has be authorized to adopt                                                               
this methodology.                                                                                                               
MR. DICKINSON  then continued  with slide 6.   He  explained that                                                               
this legislation  specifies that  [the state]  will share  in the                                                               
upstream and downstream costs.   Therefore, if the method used to                                                               
account for  the costs  were identical,  the point  of production                                                               
would  not  matter.    However,  that's  not  the  case  as  [the                                                               
legislation]  allows  upstream   costs  and  encourages  upstream                                                               
investments necessary  to find and  extract oil.   Switching from                                                               
gross  to net  causes there  to  be two  different cost  regimes.                                                               
Downstream   is  a   traditional  set   of  costs   that  include                                                               
depreciation while upstream, under  this proposed legislation, is                                                               
a  world in  which capital  costs are  deductible for  their full                                                               
amount  and qualify  for  a  20 percent  credit.     Whether  [an                                                               
entity] is  upstream or downstream determines  under which regime                                                               
the  entity falls.   He  stressed that  [the administration]  has                                                               
made the  decision that those costs  are borne by the  state, and                                                               
therefore upstream of  the point of production lots  of costs are                                                               
being allowed.                                                                                                                  
2:57:54 PM                                                                                                                    
MR. DICKINSON,  continuing with slide 7,  highlighted that access                                                               
to facilities is problematic.  As  the state allows support for a                                                               
facility,  deductions, and  credits, it  changes the  negotiating                                                               
dynamic because a  small producer now has options  that it didn't                                                               
before.  Mr. Dickinson emphasized,  "We believe, on this point of                                                               
production, the  way the  costs are  handled is  very important."                                                               
When defining gas processing  facilities, as upstream facilities,                                                               
the state  picks up  the full capital  costs immediately.   Under                                                               
the old scheme gas processing  costs were downstream of the point                                                               
of production and the entity was paid for those, he noted.                                                                      
2:59:35 PM                                                                                                                    
CO-CHAIR  RAMRAS  inquired  as  to   the  cost  to  build  a  gas                                                               
processing plant.  He asked if would cost about $3 billion.                                                                     
MR.  DICKINSON  specified that  it  would  probably cost  several                                                               
billion more than $3 billion  to build the largest gas processing                                                               
plant in  the world.   Therefore, the central gas  facility won't                                                               
be a typical plant.  In  further response to Co-Chair Ramras, Mr.                                                               
Dickinson  estimated that  it would  take about  two construction                                                               
seasons to complete construction of such a facility.                                                                            
CO-CHAIR RAMRAS surmised, "We would  be required to take the cost                                                               
of a processing plant,  cut it in two.  And  then the state would                                                               
then be  handicapped by 20 percent  of that amount as  we took it                                                               
out ... as  a credit against whatever was being  generated at the                                                               
point at which we build the  gas processing plant, which is many,                                                               
many, many years from now."                                                                                                     
MR.  DICKINSON  indicated  his agreement  with  Co-Chair  Ramras'                                                               
3:00:50 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD  inquired  as  to  whether  the  central                                                               
compression  point (CCP)  lies upstream  or  downstream from  the                                                               
point of production.                                                                                                            
MR. DICKINSON  said that at  this point, the  production facility                                                               
is upstream  of the point of  production.  He explained  that all                                                               
that [the CCP] is doing at  the production facility is taking gas                                                               
and putting  it back  in the  ground.   However, the  central gas                                                               
facility  is where  the  gas  goes to  have  the valuable  liquid                                                               
hydrocarbons stripped out of it.  The  8.5 bcf a day is then sent                                                               
to the CCP to be returned to the ground.                                                                                        
CO-CHAIR RAMRAS posed a scenario  in which the gas pipeline isn't                                                               
built for  10 years and,  given inflation,  the cost could  be $5                                                               
billion 10 years  from now. He estimated that  this one component                                                               
could  result in  a $500  million credit  a year  over two  years                                                               
because it's upstream of the production of the facility.                                                                        
MR. DICKINSON agreed.  However,  he pointed out that if inflation                                                               
is that  high, the project won't  be built unless the  gas prices                                                               
have also risen.  Mr. Dickinson  expressed that he didn't want to                                                               
confuse  the  central   gas  facility  with  the   kinds  of  gas                                                               
processing that could be occurring in other smaller units.                                                                      
CO-CHAIR  RAMRAS said  that he  is  just trying  to monetize  the                                                               
credit not define it.                                                                                                           
3:02:49 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ surmised  then that  the aforementioned                                                               
$500  million credit,  were  it producer  owned,  could be  taken                                                               
against the producer's oil profits.                                                                                             
MR.   DICKINSON   replied   yes.     In   further   response   to                                                               
Representative  Berkowitz,  Mr.  Dickinson explained  that  if  a                                                               
third  party built  a facility,  the third  party would  take the                                                               
credit and  monetize it by sale  or as payment for  the tariff is                                                               
received, a loss would have to be  shown.  He offered to take the                                                               
question and work it out  because a third party doesn't typically                                                               
build a gas plant.                                                                                                              
REPRESENTATIVE BERKOWITZ, speaking  from the state's perspective,                                                               
surmised that it would be preferable  to have a third party build                                                               
the facility.                                                                                                                   
MR. DICKINSON answered,  "All other things being  equal, we would                                                               
of  course  prefer  these  to  be  built  without  any  support."                                                               
However, the  view is that  insufficient investment  is occurring                                                               
and thus there is the desire to incentivize the investment.                                                                     
REPRESENTATIVE  BERKOWITZ commented,  "This sends  a very  strong                                                               
economic argument for the state against linkage."                                                                               
3:05:35 PM                                                                                                                    
MR. DICKINSON again offered  to review Representative Berkowitz's                                                               
point regarding an  entity with no production  making these types                                                               
of investments.   However, he opined that having  the credit will                                                               
result in either  the construction of new facilities  or the more                                                               
efficient  use   of  existing  facilities  because   of  economic                                                               
incentives.   Mr. Dickinson  then moved on  to slide  8 regarding                                                               
the  outcome   of  combining   production  and   post  production                                                               
facilities under  the current rules  and the proposed rules.   In                                                               
the  central  gas facility  both  post  production activity,  gas                                                               
processing,  and   production  activity,  conditioning   gas  for                                                               
pressure  maintenance, occur.    The aforementioned  necessitated                                                               
allocating  the costs  in  the plant  because  there are  varying                                                               
deductible  and nondeductible  costs.   Under the  proposed rules                                                               
the costs  of both [the  post production activity  and production                                                               
activity]  would be  deductible.    Therefore, the  controversies                                                               
with  regard to  the accounting  process and  determining how  to                                                               
allocate  the  costs within  the  central  gas facility  wouldn't                                                               
arise.  This  has resulted in the decision that  the costs of gas                                                               
processing  will  be treated  as  upstream  costs, although  they                                                               
would've been deductible in the past.                                                                                           
3:07:54 PM                                                                                                                    
MR.  DICKINSON  moved  on  to  slide 9  and  specified  that  the                                                               
definition  of oil  is  "when  this product  is  in condition  of                                                               
pipeline  quality."   The aforementioned  is  further defined  in                                                               
statute  as  "Good and  merchantable  condition",  which isn't  a                                                               
controversial standard.  The issue  arises with gas, particularly                                                               
gas  that's produced  in  association  with oil.    The point  of                                                               
production  [of  gas]  is the  "first  point  accurately  metered                                                               
downstream from  the point  of final  separation."   The question                                                               
then becomes why  one wouldn't apply the same standard  to gas as                                                               
is applied  to oil.   If the same  standard is applied,  when the                                                               
gas  is in  a good  and merchantable  condition is  the point  of                                                               
production  and when  the costs  should be  borne.   However, the                                                               
difficulty is that  gas isn't as clean as oil,  as it's sometimes                                                               
sold  with various  hydrocarbon liquids  and impurities  that are                                                               
later processed.   Therefore, there isn't a standard  of good and                                                               
merchantable  for   gas  and  thus  it   seems  inappropriate  to                                                               
establish such a  standard.  On the other hand,  the choice could                                                               
be  such  that  on  the  North Slope  in  Alaska,  the  point  of                                                               
production would  be when the  matter reaches the pipeline.   The                                                               
aforementioned  would mean  that  gas treatment  is  part of  the                                                               
production process and thus those costs should be borne.                                                                        
3:10:46 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ asked  if  Mr.  Dickinson has  assessed                                                               
what difference that will mean to the state.                                                                                    
MR. DICKINSON said that he  has run some models reviewing various                                                               
points  of production  and the  output of  those models  could be                                                               
shared with the committee.                                                                                                      
3:11:22 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ asked  if there is a list  of the models                                                               
that have been run.                                                                                                             
MR. DICKINSON  replied no.   He explained  that it would  be more                                                               
accurate to  say that certain  variables have been placed  into a                                                               
model as  questions were  asked.  A  series of  discrete projects                                                               
with a fully documented model hasn't been performed.                                                                            
REPRESENTATIVE  BERKOWITZ  related  his belief  that  unless  the                                                               
legislature  specifically asks  for a  model, it  doesn't receive                                                               
it.  Therefore, he indicated that  there may be a range of models                                                               
that  perhaps   the  legislature  should  request   that  may  be                                                               
available, although not disclosed.                                                                                              
MR. DICKINSON  expressed that he  has been honest with  regard to                                                               
whether models  have been  performed on  various scenarios.   The                                                               
hesitation, he  explained, comes  from the possibility  of models                                                               
being  originally   created  under   a  different   context  with                                                               
different variables than the question.                                                                                          
3:13:25 PM                                                                                                                    
MR. DICKINSON  continued with  slide 10  regarding the  result of                                                               
combining gas processing and gas  treatment.  Under current rules                                                               
both  gas  processing  and  gas  treatment  are  post  production                                                               
activities, and therefore  there would be no  allocation of costs                                                               
necessary.  However,  under the proposed rules it  may require an                                                               
allocation of costs.  Although the  decision could be to move gas                                                               
treatment upstream  of point  of production  and deal  with those                                                               
costs  differently  than  transportation costs,  the  legislation                                                               
views the gas treatment as more like a transportation cost.                                                                     
REPRESENTATIVE  CRAWFORD  recalled  discussion a  few  years  ago                                                               
regarding putting  gas into  the existing  pipeline as  a liquid.                                                               
If  the aforementioned  was pursued,  how would  this legislation                                                               
impact that, he asked.                                                                                                          
MR. DICKINSON  related his  understanding that  if gas  was going                                                               
through a manufacturing  process to create the oil,  the point of                                                               
production  for  that oil  would  be  at  the  same place  it  is                                                               
3:15:37 PM                                                                                                                    
MR.  MINTZ   pointed  out  that  this   legislation  defines  gas                                                               
processing  as a  physical process  by which  liquid hydrocarbons                                                               
are  extracted  from a  gaseous  stream.    However, he  said  he                                                               
understood  the  gas  to  liquids  process  to  utilize  chemical                                                               
processes  that  he  didn't  believe   would  be  considered  gas                                                               
processing but would rather be considered a downstream activity.                                                                
3:16:09 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD  inquired  as   to  the  impact  on  the                                                               
government's take  if a  gas to liquids  approach is  utilized in                                                               
the future.                                                                                                                     
MR. DICKINSON,  providing a quick  analysis, said that  gas would                                                               
be  produced  and  it  would be  a  manufacturing  process,  post                                                               
production process,  and thus  the state would  bear the  cost of                                                               
it.  Under this legislation,  the state wouldn't bear the capital                                                               
costs, but a reasonable allowance  would have to be available for                                                               
the cost to ship it to market.                                                                                                  
REPRESENTATIVE CRAWFORD  asked if  it would be  taxed at  the oil                                                               
MR. DICKINSON  clarified that it would  be taxed at the  PPT rate                                                               
under the proposal and at 10 percent under the existing system.                                                                 
3:17:23 PM                                                                                                                    
MR.  DICKINSON moved  on to  slide 11,  which traces  through the                                                               
current  point of  production with  the central  gas facility  in                                                               
Prudhoe Bay  and how that impacts  costs.   Currently,  there are                                                               
six separation centers  where the separation between  oil and gas                                                               
occurs.    When oil  is  finally  metered  or measured  prior  to                                                               
delivery  to TAPS,  the lease  automatic custody  transfer (LACT)                                                               
meter is  the point  of production for  oil.   However, something                                                               
comes out of the separation facilities  such that at the inlet of                                                               
the  central gas  facility is  the point  of production  for gas.                                                               
The aforementioned is  the first time after  separation that [the                                                               
gas] can be accurately measured.   He then turned the committee's                                                               
attention to slide  12, which is similar to  the flow illustrated                                                               
on slide 11.  However, the  point of production for gas has moved                                                               
from the inlet  to the central gas facility to  when the products                                                               
leave the central gas facility [after] final separation.                                                                        
3:19:43 PM                                                                                                                    
CO-CHAIR SAMUELS surmised, "Royalties are  not moving it, for tax                                                               
purposes only."                                                                                                                 
MR. DICKINSON said that's correct.                                                                                              
CO-CHAIR SAMUELS then inquired as to  how far into the process of                                                               
developing a field  would the central gas facility be  built.  He                                                               
also inquired  as to whether  it would  be cheaper to  utilize an                                                               
existing central gas facility or build such a facility.                                                                         
3:20:10 PM                                                                                                                    
MR. DICKINSON  said when a  field starts  up very little  gas, as                                                               
compared oil, is  produced.  Therefore, the  central gas facility                                                               
will be  the last  facility built  in the  field as  gas handling                                                               
needs increase.                                                                                                                 
CO-CHAIR  SAMUELS assumed  that  for the  company  that builds  a                                                               
central gas facility, it's positive  and some of the profits will                                                               
increase.   "How much of  a concern should  there be on  the $500                                                               
million credit?  How much are we going to go up," he asked.                                                                     
MR. DICKINSON  said that  the positive  economics that  come from                                                               
the  credit should  impact [the  construction of  a gas  handling                                                               
facility].  If  it makes sense from the producer's  point of view                                                               
to build  a gas  handling facility,  it should  for the  state as                                                               
well, he said.                                                                                                                  
CO-CHAIR  SAMUELS asked  if there  was discussion  regarding cost                                                               
recovery  of the  central gas  facility over  a longer  period of                                                               
time in order to mitigate some risks.                                                                                           
MR. DICKINSON recalled that there was no such discussion.                                                                       
3:23:02 PM                                                                                                                    
MR. DICKINSON concluded  with slide 13, which defines  two of the                                                               
goals  that are  being worked  toward.   He highlighted  that the                                                               
goals are  to have simplified  definitions that will not  lead to                                                               
low  value-added  conflicts  and to  incentivize  all  production                                                               
[HB 488 was held over]                                                                                                          

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