Legislature(2005 - 2006)CAPITOL 124

03/15/2006 01:15 PM RESOURCES

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01:18:44 PM Start
01:20:44 PM HB488
04:02:47 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time Change --
Heard & Held
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be HOUSE BILL  NO. 488, "An Act repealing the  oil production tax                                                               
and gas production tax and providing  for a production tax on the                                                               
net value  of oil and  gas; relating  to the relationship  of the                                                               
production  tax  to  other  taxes;  relating  to  the  dates  tax                                                               
payments  and surcharges  are  due under  AS  43.55; relating  to                                                               
interest  on  overpayments  under   AS  43.55;  relating  to  the                                                               
treatment  of  oil  and  gas   production  tax  in  a  producer's                                                               
settlement with  the royalty owner;  relating to flared  gas, and                                                               
to oil  and gas  used in  the operation of  a lease  or property,                                                               
under AS  43.55; relating to the  prevailing value of oil  or gas                                                               
under AS  43.55; providing  for tax credits  against the  tax due                                                               
under AS 43.55 for certain  expenditures, losses, and surcharges;                                                               
relating to statements or other  information required to be filed                                                               
with or furnished  to the Department of Revenue,  and relating to                                                               
the penalty for failure to  file certain reports, under AS 43.55;                                                               
relating to the  powers of the Department of Revenue,  and to the                                                               
disclosure  of certain  information required  to be  furnished to                                                               
the Department of  Revenue, under AS 43.55;  relating to criminal                                                               
penalties for  violating conditions  governing access to  and use                                                               
of  confidential   information  relating  to  the   oil  and  gas                                                               
production tax;  relating to  the deposit  of money  collected by                                                               
the  Department  of  Revenue  under AS  43.55;  relating  to  the                                                               
calculation of the gross value at  the point of production of oil                                                               
or  gas;  relating to  the  determination  of  the net  value  of                                                               
taxable oil and  gas for purposes of a production  tax on the net                                                               
value  of oil  and gas;  relating  to the  definitions of  'gas,'                                                               
'oil,' and certain  other terms for purposes of  AS 43.55; making                                                               
conforming amendments; and providing for an effective date."                                                                    
CO-CHAIR SAMUELS noted that there  is a Committee Substitute (CS)                                                               
that will be  ready soon, and the major changes  brought about by                                                               
the forthcoming  CS were made public  the previous day.   He said                                                               
it is being reviewed by Robert Mintz of the Department of Law.                                                                  
1:20:44 PM                                                                                                                    
BRIAN  WENZEL,  Vice  President of  Finance  and  Administration,                                                               
ConocoPhillips Alaska, Inc. (Conoco),  said the changes presented                                                               
by the  House Resources Standing  Committee will have  a negative                                                               
impact on the attractiveness of  investments in Alaska by Conoco.                                                               
He  said Conoco  absolutely opposes  any proposals  that increase                                                               
its  taxes  beyond  the  $1  billion per  year  proposed  by  the                                                               
governor.   He said the  CS increases  taxes by $18  billion over                                                               
the next  10 years  if oil  prices stay  the same.   He  said the                                                               
proposal puts state  revenue and jobs for Alaskans at  risk.  The                                                               
CS destroys  the balance that was  contained in HB 488.   He said                                                               
consultants  informed the  committee that  the state  may see  an                                                               
increase in  investments by such  a tax,  but he said  Conoco has                                                               
hired consultants too.  The  consultants aren't the ones who need                                                               
to  live with  the  tax.   The consultants  who  are telling  the                                                               
committee that the CS will not  have a negative impact are wrong,                                                               
he opined.   Taking  away billions of  dollars from  his industry                                                               
will have a negative impact,  and taking a significant portion of                                                               
the upside potential in a basin  that has long lead times and low                                                               
prospectivity  will  negatively   affect  investments  and  state                                                               
revenue.   "It is  a natural  consequence of  the action  you are                                                               
taking," he stated.                                                                                                             
1:24:52 PM                                                                                                                    
MR.  WENZEL said  the CS  will cause  Conoco and  others to  lose                                                               
confidence in  the state.   He said  the unreasonable  changes in                                                               
the CS  will cause investors  to question when Alaska  will again                                                               
change its tax  regime and again "impose  an unfair, unreasonable                                                               
burden."   It  is  irrelevant  if the  future  change  will be  a                                                               
production tax, property tax, corporate  income tax or a new tax.                                                               
"The point  is that investors  will now need to  consider another                                                               
significant risk  in making their  economic decisions  in Alaska:                                                               
the  risk that  Alaska  will not  approach  future fiscal  policy                                                               
changes  in a  reasonable manner  that recognizes  the commitment                                                               
and  contributions"  of Conoco  and  others.    He said,  "As  an                                                               
example  of the  type  of thinking  that  will negatively  affect                                                               
potential future  investors' view  of Alaska," Conoco  received a                                                               
letter  from Alaska  Representative Les  Gara and  Senator Hollis                                                               
French regarding  Conoco's media ads.   The letter  suggests that                                                               
private sector  profits are  bad, that  state government  has not                                                               
shared in  the benefit  of higher oil  prices, and  that Conoco's                                                               
commitment is  irrelevant.  He  is concerned about  the antipathy                                                               
expressed in the  letter.  "It has become, for  some, an exercise                                                               
in seeing  how much the  state can  take from the  private sector                                                               
for no other reason [than  to] simply take more."  "Unfortunately                                                               
this  CS  is structured  to  take  more  from the  very  industry                                                               
participants that are most committed to Alaska's future."                                                                       
1:27:10 PM                                                                                                                    
MR.  WENZEL  said  the House  Resources  Standing  Committee  has                                                               
destroyed  the balance  in  the governor's  bill.   The  proposed                                                               
profit-based  petroleum production  tax  (PPT) is,  in effect,  a                                                               
windfall profit  tax.  At today's  prices it will triple  the tax                                                               
rate of the  current Alaska tax system.  "This  change is neither                                                               
fair or  reasonable to  current investors and  will be  viewed as                                                               
unreasonable  and  unfair  by  potential  future  investors,"  he                                                               
stated.   The  CS penalizes  the  very companies  that have  been                                                               
developing  oil and  creating jobs  in  Alaska.   It reduces  the                                                               
value of credits.  "These credits  only affect about 4 percent of                                                               
the   Department  of   Revenue's  expected   future  sources   of                                                               
production and investment in Alaska," he stated.                                                                                
1:28:50 PM                                                                                                                    
MR.  WENZEL  said, "You  have  reduced  by  over 30  percent  the                                                               
effective  value of  the  base allowance,  which  is intended  to                                                               
encourage small explorers  and new entrants.  You  have moved the                                                               
effective  date of  this bill  back to  a completely  impractical                                                               
date."  He said procedures  and computer systems "cannot possibly                                                               
be adopted by  April 1 of this year, which  means that production                                                               
taxpayers in  Alaska will have  to guess at their  tax liability,                                                               
make  unsupported payments  of  tax in  an  uncertain attempt  to                                                               
avoid punitive interest cost.   And you have suggested a punitive                                                               
interest penalty  of 5 percent on  top of a statutory  rate of 11                                                               
percent, which,  obviously already includes a  punitive element."                                                               
He said  the changes in  the CS are completely  inconsistent with                                                               
the goals of a fair and reasonable fiscal policy," he said.                                                                     
1:30:03 PM                                                                                                                    
CO-CHAIR  RAMRAS  thanked  Mr.  Wenzel  for  his  thoughtful  and                                                               
sensitive testimony.                                                                                                            
REPRESENTATIVE  KAPSNER  asked for  a  copy  of the  letter  from                                                               
Representative Gara and Senator French.                                                                                         
1:30:19 PM                                                                                                                    
REPRESENTATIVE KAPSNER  said the industry recognized  that it was                                                               
time to  make a  change in taxes  and it's done  once in  a great                                                               
while, "so I  do have concerns with the ads  that you are running                                                               
giving  the  public the  perception  that  redoing our  taxes  is                                                               
completely unthinkable."                                                                                                        
MR. WENZEL  said the point  of Conoco's  ads is that  Conoco sees                                                               
where  the legislature  is going,  including the  summary of  the                                                               
House  Resources' CS,  and it  is not  a balanced  and reasonable                                                               
approach.  It is a tax and spend approach, he stated.                                                                           
REPRESENTATIVE KAPSNER asked if  Conoco made the commercial after                                                               
the CS summary was developed.                                                                                                   
MR.   WENZEL  said   no;  the   commercials  were   done  before,                                                               
"but many of these questions have  been coming along.  The CS has                                                               
not yet  been released."  He  stated that the governor's  bill is                                                               
balanced, and "it was a hard pill  for us to swallow," but it was                                                               
accepted  in order  to go  forward  with investment  and the  gas                                                               
1:32:10 PM                                                                                                                    
REPRESENTATIVE KAPSNER said the industry  felt that the bill from                                                               
the governor was  an end product.  Speaking  from the legislative                                                               
branch, she said it is "pretty  far reaching to expect 60 members                                                               
of  the  legislature  who  are elected  to  represent  their  own                                                               
communities,  to  just  say,  'Oh,  this  is  what  the  governor                                                               
decided, OK...Our  work is  done."  There  are three  branches of                                                               
government; the  legislature appropriates the budget,  sets taxes                                                               
and makes  laws.  The governor  signs the laws and  upholds them.                                                               
She  said, "It  is  within our  purview  to take  a  look at  the                                                               
governor's  product.   And I  think that  it is  insulting, to  a                                                               
large degree, to  think that we should just say  our work is done                                                               
before  we take  into  consideration what  the consultants  said.                                                               
Every consultant  that has  been before  us has  said 25/20  is a                                                               
good starting point."                                                                                                           
1:33:48 PM                                                                                                                    
MR. WENZEL said no  one has said not to debate  the bill, in fact                                                               
"we recognize the  sovereignty of the legislature."   He said his                                                               
hope  was  that by  meeting  with  legislators privately  and  by                                                               
testimony, he  could help the  legislature come to the  same view                                                               
as the  governor in terms of  meeting the needs of  the state and                                                               
growing  the industry.   He  said he  hoped that  the legislature                                                               
would come  to the same conclusion.   He said he  never heard the                                                               
committee discuss  lowering the  tax rate  in order  to stimulate                                                               
more investment.                                                                                                                
1:35:15 PM                                                                                                                    
REPRESENTATIVE GATTO  said he  heard Mr. Wenzel  say that  if oil                                                               
prices continue  then Conoco  will lose  $1.8 billion  [under the                                                               
CS].  If  prices continue at about $62 per  barrel, he asked, how                                                               
much will Conoco profit in Alaska?                                                                                              
MR. WENZEL  said he doesn't have  that number.  He  said there is                                                               
no  dispute that  Conoco will  make significant  profits at  that                                                               
REPRESENTATIVE GATTO  said he  is suggesting  that there  must be                                                               
some level of  oil price where Conoco thinks  it is unbalanced--a                                                               
term  Mr.   Wenzel  uses.     Current  taxes   are  substantially                                                               
unbalanced like  a "teeter totter that  is shoved all the  way to                                                               
one end,  and what we  are trying to  do is rebalance  the teeter                                                               
totter."   He said, "Of course  the person who had  the advantage                                                               
is  going to  say  the  initial proposal  was  tolerable, but  it                                                               
didn't really lead to a balance."   He said he saw the television                                                               
ads, and he thought,  as well as a lot people,  that the ads were                                                               
dirty.  The  ads tried to convince the public  that Conoco was in                                                               
trouble and  would pull out  of Alaska  because of taxation.   He                                                               
said he  wishes he had  the money to  write a  TV ad in  order to                                                               
present the  other side of the  issue.  He said  Conoco should be                                                               
on notice  that that  sort of  thing doesn't  help because  it is                                                               
one-sided.  He said it is an issue  of fairness.  He said that is                                                               
why he  asks the question:   "At  current prices, a  reduction of                                                               
$1.8 billion in  ConocoPhillips' profits represents what?   Is it                                                               
truly unfair?   If  we turned  around and wrote  you a  check for                                                               
$1.8 billion on  top of what you're going to  make at the current                                                               
prices,  wouldn't you  think that  is  the most  unfair thing  we                                                               
could do?"                                                                                                                      
1:38:54 PM                                                                                                                    
MR. WENZEL said he disagrees on  several counts.  Conoco looks at                                                               
"that profit tax, that structuring,  with a net cash flow element                                                               
as a  very progressive tax.   "As  the industry does  better, the                                                               
state also will receive more in tax  revenue."  He said it is not                                                               
simply a  flat dollar amount,  so the original bill  was balanced                                                               
at  all prices.   He  said Representative  Gatto seemed  to imply                                                               
that Conoco  is not going to  run away, and Mr.  Wenzel said that                                                               
was  right because  the company  has too  much invested  in large                                                               
assets.    He  noted  that  those  large  assets  take  money  to                                                               
maintain, and  if Conoco loses  confidence to make  big long-term                                                               
investments there will be a decline in jobs and revenues.                                                                       
1:40:43 PM                                                                                                                    
MR. WENZEL said  his company will make money at  high prices, but                                                               
the state receives a lot money by having Conoco here.                                                                           
REPRESENTATIVE  CRAWFORD  said since  this  all  started, he  has                                                               
asked questions  to the  oil companies of  what they  based their                                                               
projections on and  has never gotten any answer  other than "your                                                               
guess  is about  as good  as  mine."   He noted  that Mr.  Wenzel                                                               
presented firm numbers about how  much Conoco will lose in taxes.                                                               
He asked  what he was basing  that on, because if  oil prices are                                                               
under $32  per barrel, this  bill allows  Conoco to pay  less tax                                                               
than under  the current system,  so "this  makes you money."   He                                                               
said  there is  plenty to  be unhappy  about on  every side.   He                                                               
really worries  about Alaska  at the lower  end, "although  $32 a                                                               
barrel would have  made us all real overjoyed two  or three years                                                               
1:43:26 PM                                                                                                                    
MR.  WENZEL  said  Conoco  does not  make  their  price  forecast                                                               
public, but economists  aren't saying that prices will  rise.  He                                                               
used the number  that the administration used  at today's prices.                                                               
He said  Representative Crawford's guess  is as good  as Conoco's                                                               
in  terms of  whether  the  price of  oil  will  stay at  current                                                               
levels.   He said the PPT  results in Conoco perhaps  paying less                                                               
taxes than  under the current  tax system.   The premise  is that                                                               
the state  was willing to accept  that downside to get  more from                                                               
the  upside.   He  said  the  PPT  system  is beneficial  to  the                                                               
industry when profits are down.                                                                                                 
1:45:32 PM                                                                                                                    
REPRESENTATIVE LEDOUX said Conoco didn't  create its ads when the                                                               
CS  summary came  out.   She asked  when the  company did  create                                                               
MR. WENZEL said it  was in the last week or  more that Conoco put                                                               
those  ads together.   He  said  it was  based on  the fact  that                                                               
testimony  has   been  one-sided,   and  it  was   his  company's                                                               
obligation to show the other side.                                                                                              
1:46:39 PM                                                                                                                    
REPRESENTATIVE OLSON  expressed his understanding that  Conoco is                                                               
going into Libya.                                                                                                               
MR. WENZEL said that is correct.                                                                                                
REPRESENTATIVE  OLSON  noted  that all  American  companies  were                                                               
thrown out  20 years ago and  the industry was nationalized.   He                                                               
asked what the government take in  Libya is; he heard it is about                                                               
90 percent.                                                                                                                     
MR. WENZEL said it is very high,  but the different in Libya is a                                                               
question  of prospectivity  and the  likelihood of  finding large                                                               
resources.  Conoco  will be "stepping into  assets" it previously                                                               
had there.                                                                                                                      
1:47:49 PM                                                                                                                    
REPRESENTATIVE  OLSON asked  if  Conoco will  be  running ads  on                                                               
Libyan television.                                                                                                              
1:48:08 PM                                                                                                                    
REPRESENTATIVE KAPSNER said  she now has a copy of  the letter by                                                               
Representative  Gara and  Senator French,  and she  does not  see                                                               
where  the letter  says that  private profits  are bad,  which is                                                               
what Mr. Wenzel stated.  The  letter says "the ads are misleading                                                               
at a  time when it is  very important to educate  Alaskans fairly                                                               
about  the issues  of  oil tax  reform."   The  letter says  that                                                               
Conoco  implies [in  its ads]  that it  is paying  too much,  but                                                               
after-tax profits  are staggeringly  high.   She said  the letter                                                               
does  not  note  that  profits  are a  bad  thing.  "All  of  us,                                                               
especially me,  are acutely aware  of the contribution  that your                                                               
industry makes to  Alaska."  She said,  "We definitely appreciate                                                               
that," but  she is  concerned about  how the  state will  pay the                                                               
bills  in the  future.   There has  been a  financial decline  in                                                               
education  and corrections,  and "we're  nervous about  how we're                                                               
going  to  pay  the  bill."    She  said  she  didn't  think  any                                                               
legislator  feels  that Conoco  should  not  make a  profit,  but                                                               
everyone is just trying to judge what is fair.                                                                                  
1:50:26 PM                                                                                                                    
MR.  WENZEL said  when he  reads the  letter he  sees an  implied                                                               
complaint about being profitable in Alaska.                                                                                     
REPRESENTATIVE KAPSNER  said the ads are  misleading because they                                                               
imply that Alaska's tax is too  high and changing it will cripple                                                               
the industry.  She noted Conoco's  $829 million profit.  She said                                                               
she  is  not  out  to  scare  Conoco away,  but  the  ads  are  a                                                               
disservice to the  public who don't get a chance  to look at your                                                               
bottom line.                                                                                                                    
1:51:52 PM                                                                                                                    
MR. WENZEL said Conoco does not believe the ads are misleading.                                                                 
CO-CHAIR SAMUELS said he may be  the only one, but the ads didn't                                                               
bother him, and perhaps it is because he is cynical.                                                                            
1:52:20 PM                                                                                                                    
CO-CHAIR SAMUELS  said he appreciates  the civility shown  to him                                                               
and the Co-Chair by the industry and the administration.                                                                        
1:53:06 PM                                                                                                                    
PAT FOLEY,  Manager, Lands and External  Affairs, Pioneer Natural                                                               
Resources, said Pioneer  is a relatively new  investor in Alaska.                                                               
He said when considering changes  in taxation the legislature can                                                               
shoot low or  high.  He said the governor's  bill shoots a little                                                               
low and leaves a vibrant industry,  but the CS does not.  Looking                                                               
at the  proposed tax  structure and the  value of  the exemption,                                                               
the CS  will not create the  investment-friendly environment that                                                               
was the  goal of the administration,  he said.  It  fails to take                                                               
into  account that  at higher  oil prices,  production costs  are                                                               
higher.   In  2005 there  was  a 50  percent cost  increase.   He                                                               
expects it  will go up  in 2006.  It  is a misconception  that as                                                               
oil  price   rises,  the  profit   margin  increases   in  direct                                                               
relationship.  He said the  profit margin decreases because costs                                                               
MR. FOLEY  said the CS appears  to extend the SB  185 credits for                                                               
ten  years, which  is helpful  but only  somewhat modestly.   The                                                               
credits  have  a provision  of  taking  a  40 percent  credit  on                                                               
certain  activities,  but because  only  some  of the  costs  are                                                               
eligible,  it translates  to  an effective  credit  that is  much                                                               
closer to 30  percent.  He said he believes  a more efficient and                                                               
beneficial way  to incent  the industry would  be through  a PPT;                                                               
"simply take the  20 percent number and push it  up...and have it                                                               
apply  not to  just exploration,  but also  to development."   He                                                               
said the bill  has a proposal that $10 million  of credits can be                                                               
purchased at the  state at face value, which is  beneficial to an                                                               
explorer but  not necessarily  to a developer.   He  said Pioneer                                                               
will spend about  $100 million in investments at  Oooguruk in the                                                               
next two years and then about  $50 million for the drilling phase                                                               
"for the next couple of years."   He said he hopes it is combined                                                               
with  a robust  exploration  program.   He  said Pioneer's  total                                                               
investments in  Alaska would  generate credits  far in  excess of                                                               
$10 million.  He  said it is helpful to sell  them at face value,                                                               
but "we're left with: to whom do we sell our remaining credits?"                                                                
1:58:00 PM                                                                                                                    
CO-CHAIR SAMUELS asked  about the amount of  credits for Oooguruk                                                               
or another development like that.   He said he had "concerns with                                                               
an open-ended...the  state has to just  [be] on the hook  to buy,                                                               
so "what  range of numbers  would you  want the 100  percent buy-                                                               
back for?"   He said his  concern was "opening it  up to hundreds                                                               
and hundreds of millions of dollars."                                                                                           
MR.  FOLEY  said  investments  at Oooguruk  will  be  about  $125                                                               
million, and combined with an  exploration program it is close to                                                               
$150 million.   He said Pioneer  has no production, "so  we would                                                               
be looking  at, not just a  20 percent investment credit,  but we                                                               
would also  be looking to sell  our loss...so 40 percent  of $150                                                               
million is $60 million."                                                                                                        
1:59:18 PM                                                                                                                    
REPRESENTATIVE SEATON asked if it  is a better provision over the                                                               
sellable credit  that was in the  original bill and if  Mr. Foley                                                               
would like it to be higher.                                                                                                     
MR. FOLEY  said yes; it could  be a discount floor  and the state                                                               
would buy  it at  a certain percent.   He said  it would  also be                                                               
helpful to expand  the pool of who Pioneer could  sell the credit                                                               
to,  "specifically,  if  the  credit could  be  taken,  not  only                                                               
against  PPT tax,  but also  against  income tax,  then it  would                                                               
broaden the pool outside of the industry."                                                                                      
2:00:17 PM                                                                                                                    
CO-CHAIR  SAMUELS  said  that  the  entire  industry  has  gotten                                                               
together  on that.    "The thinking  of not  having  it with  the                                                               
income  tax was  that at  low prices  we're already  taking risks                                                               
from the progressivity,  but at the low we are  getting less.  We                                                               
didn't want to put the state on  the hook also for the income tax                                                               
money.  We wanted to have some steady cash flow at the low end."                                                                
REPRESENTATIVE  SEATON said  the  committee  was talking  earlier                                                               
about 90  percent.  "Is  90 percent a  floor that you  could live                                                               
with and that would be helpful?                                                                                                 
2:01:15 PM                                                                                                                    
MR. FOLEY said 90 percent would be a helpful number.                                                                            
CO-CHAIR   SAMUELS  said   it  is   free   money  to   ExxonMobil                                                               
Corporation, BP  Alaska and Conoco,  and he assumes  they compete                                                               
against each other.                                                                                                             
MR. FOLEY said if the bill  must have a progressive tax rate, and                                                               
if  the trigger  is an  oil price,  Pioneer would  encourage that                                                               
whatever prices  are used, that  they be inflation adjusted.   He                                                               
said the benchmark should be  ANS [Alaska North Slope] West Coast                                                               
delivered price instead of WTI [West Texas Intermediate].                                                                       
2:02:34 PM                                                                                                                    
CO-CHAIR  RAMRAS   said  he  is  sensitive   to  an  inflationary                                                               
component  because the  cost  of  exploring will  go  up, but  he                                                               
questioned whether  the price of  oil is subject to  inflation or                                                               
driven  by speculators  and global  events.   He  noted that  the                                                               
costs incurred  in bringing  oil to  market is  inflationary, but                                                               
perhaps not the cost of oil.                                                                                                    
2:04:02 PM                                                                                                                    
MR. FOLEY  said there may not  be a direct link  in inflation and                                                               
the price of oil, but there is a  time value in money.  It may be                                                               
considered  a  discount  rate  instead  of  an  index.    If  the                                                               
legislation  is based  on a  benchmark price,  that price  should                                                               
have the same buying power throughout the term of the bill.                                                                     
CO-CHAIR RAMRAS  noted that  that issue is  addressed in  the PPT                                                               
since it is  a tax based on  profits, and he asked if  it is just                                                               
the progressive part of the tax that Mr. Foley is criticizing.                                                                  
2:05:52 PM                                                                                                                    
MR.  FOLEY said  he  needs to  think  about that.    He said  the                                                               
progressive  nature is  that at  higher prices  the state  should                                                               
enjoy a bigger piece of the pie,  "and my point is that make sure                                                               
those are real price changes and not just through inflation."                                                                   
2:06:28 PM                                                                                                                    
CO-CHAIR RAMRAS asked  if Mr. Foley was saying that  the PPT part                                                               
works, but the progressivity piece is not inflation-adjusted.                                                                   
MR. FOLEY said yes.                                                                                                             
2:06:56 PM                                                                                                                    
REPRESENTATIVE CRAWFORD said if  the legislature is worried about                                                               
inflation-proofing oil taxes,  it should also think  the same way                                                               
about  the minimum  wage, unemployment  insurance, poverty  rates                                                               
and others, "but we don't."                                                                                                     
2:08:05 PM                                                                                                                    
CO-CHAIR SAMUELS  said as long  as this  legislation is not  in a                                                               
contract,  "you would  always have  the ability  to petition  the                                                               
government to come and adjust things  like the minimum wage."  He                                                               
said putting  a price  of oil in  this legislation  was difficult                                                               
because in five years it  could be arbitrary.  Inflation indexing                                                               
assumes something  he doesn't think  is true,  he said.   He said                                                               
the industry  will not  be shy about  trying to  change something                                                               
2:09:09 PM                                                                                                                    
MARK HANLEY, Manager, Public Affairs,  Anadarko Oil Company, said                                                               
he used  to be  in the  legislature when it  faced a  fiscal gap.                                                               
The  original  20/20  [tax  rate/credit   rate  ratio]  that  the                                                               
governor wanted was balanced,  it improved Anadarko's exploration                                                               
economics, and the company felt good  about the proposal.  The CS                                                               
goes  a  little in  the  opposite  direction,  he said,  and  his                                                               
company's  costs have  gone up  so  this is  not as  good as  the                                                               
20/20.   The  CS  is  a little  worse  for  exploration than  the                                                               
original bill, he opined.  The  40 percent credits that are going                                                               
to be  extended are  a benefit,  but not  enough to  offset other                                                               
changes in  the CS.   The exploration incentive credits  are only                                                               
for the  first exploration well,  but the credits  throughout the                                                               
PPT  formula apply  to exploration  wells, delineation  wells and                                                               
development costs.                                                                                                              
2:12:09 PM                                                                                                                    
CO-CHAIR SAMUELS  said the  reduction of the  $73 million  to $50                                                               
million is  not offset enough by  the SB 185 extension;  "is that                                                               
the trade off you're talking about?"                                                                                            
MR. HANLEY said yes; there is  an assumption that as the price of                                                               
oil  goes higher,  oil  companies can  pay more.    He said  that                                                               
doesn't  take  costs  into  consideration.     He  said,  "We  do                                                               
discounted  rates.   You saw  a net  present value  analysis; the                                                               
whole point  of that was to  say, 'hey, here's the  time value of                                                               
money.   It's worth  less in the  future than it  is today."   He                                                               
said he  would agree that  if today the price  of oil goes  up to                                                               
$100 per barrel, Anadarko's costs won't  go up.  But if the price                                                               
of oil goes up  to $60 or $70 per barrel  over a ten-year period,                                                               
it is likely that Anadarko's costs will  go up.  He said that the                                                               
original PPT works  itself out, but under the escalator,  it is a                                                               
tax on the gross revenues that  does not have a consideration for                                                               
costs.   The bill had  an inflation  adjustor at $40  per barrel.                                                               
If the price of oil goes up to  $100 per barrel for six months or                                                               
a year,  the tax  on gas  will go up,  and the  price of  gas may                                                               
still be  at $6 per  MCF, and it can  have a dampening  effect on                                                               
gas exploration.                                                                                                                
2:15:39 PM                                                                                                                    
REPRESENTATIVE  SEATON said  he understands  separating gas  from                                                               
oil  for  prospectivity,  and  he  asked  about  a  schedule  for                                                               
prospectivity that Mr. Hanley would like.                                                                                       
2:16:22 PM                                                                                                                    
MR. HANLEY said he will work on it.                                                                                             
REPRESENTATIVE  SEATON asked  about  the cost  increases, and  he                                                               
said that  most industries have  been worried about  energy costs                                                               
because that  is a huge factor.   But the oil  industry gets free                                                               
use of gas and oil, he pointed out.                                                                                             
2:17:19 PM                                                                                                                    
MR.  HANLEY said  Anadarko needs  to  pay those  energy costs  by                                                               
paying contractors who run the drilling  rigs.  The high costs of                                                               
energy  is  driving up  steel  prices.    He said  obviously  the                                                               
company gets more revenue, but it does have a cost impact to it.                                                                
REPRESENTATIVE SEATON said  he was talking about all  the gas for                                                               
compressor stations, gas for drilling  rigs, and all the oil used                                                               
in operations in the field and in  the lease area.  "I don't even                                                               
think you pay royalties on those."                                                                                              
2:18:14 PM                                                                                                                    
MR. HANLEY  said his company  does have that fuel  available, but                                                               
other costs go up.                                                                                                              
2:18:45 PM                                                                                                                    
CO-CHAIR  RAMRAS   pointed  out   the  irony  of   oil  companies                                                               
explaining increases in  their costs because the  price of energy                                                               
is going  up.   He said gas  and oil move  separately, and  he is                                                               
concerned  that natural  gas has  its own  volatility.   He asked                                                               
what would  be good prospectivity  for gas.  Natural  gas tripled                                                               
recently and  has fallen in  the last several  days.  There  is a                                                               
need  to address  that separately.   Progressivity  is now  a key                                                               
component of HB488.                                                                                                             
2:20:39 PM                                                                                                                    
MR. HANLEY said picking the  appropriate number is more the issue                                                               
than the concept of progressivity.                                                                                              
2:21:58 PM                                                                                                                    
CO-CHAIR  RAMRAS said,  "Capex  [capital  expenditures] and  opex                                                               
[operational expenditures]  have an inflation component  but it's                                                               
addressed in  the PPT.   So it  is really only  the progressivity                                                               
piece that is  subject to some degree  to inflationary pressure."                                                               
But, he said, natural gas  has not followed an inflationary curve                                                               
since Hurricane Katrina.   It has followed  speculators and world                                                               
events.     How  can  the   progressivity  be   maintained  while                                                               
addressing inflation on the windfall side? he asked.                                                                            
2:22:58 PM                                                                                                                    
MR. HANLEY said there could be  an inflation factor or "you could                                                               
actually put  it below the  line that  allows you to  deduct your                                                               
expenses."   He said he  would have to  think about it,  but "the                                                               
main  point is,  just looking  at the  price side...there  can be                                                               
cost factors that  are not being considered as part  of that, and                                                               
that can have a negative impact."                                                                                               
2:24:06 PM                                                                                                                    
REPRESENTATIVE SEATON  said it  is a profit-based  tax so  all of                                                               
the costs get subtracted out.   It is all taken into account; the                                                               
tax is based on profit,  and increased costs get deducted "before                                                               
we ever get to applying the tax anyway."                                                                                        
2:24:50 PM                                                                                                                    
MR. HANLEY said that is not correct.   The 20 percent tax will be                                                               
on profit, but the incremental taxes will be on gross income.                                                                   
CO-CHAIR SAMUELS said, "It is deductible  off of the PPT.  So the                                                               
$50 mark could be in the  wrong place as your costs increase; you                                                               
could get to  the point where you're not making  as much money at                                                               
$50-you could inflation-proof the 50 to  go up higher.  But costs                                                               
could decrease with technology, in  which case the $50 line could                                                               
move over."                                                                                                                     
2:25:31 PM                                                                                                                    
MR.  HANLEY   said  at   $60  per  barrel   under  the   CS,  "my                                                               
understanding is  up to  $50, you  have the 20  percent.   So you                                                               
have  the  $10  a  barrel   increase;  you  have  a  0.3  percent                                                               
escalator, so $10 time 0.3 gives  you a 3 percent additional tax,                                                               
right?"  He continued: "You will  take 3 percent times your gross                                                               
revenue before you deduct anything; you'll  get a tax.  That will                                                               
set  over here.    Then  you go  through  [and]  deduct all  your                                                               
expenses and costs and come up  with net income, multiply that by                                                               
20 percent, [which] will  give you a tax.  You  add the two taxes                                                               
together and  that's your gross  tax against which you  can apply                                                               
credits.  And that's where the  problem with that 3 percent; [it]                                                               
does not  have a cost factor  in it.  It's  just multiplied times                                                               
your gross revenue."                                                                                                            
2:26:33 PM                                                                                                                    
The committee took an at-ease from 2:26 PM to 2:31 PM.                                                                          
2:31:52 PM                                                                                                                    
ANGUS  WALKER,  Commercial Vice  President,  BP  Alaska, said  he                                                               
stands by  previous testimony that he  has given.  He  said since                                                               
1999  industry and  the Department  of Revenue  have consistently                                                               
overestimated  production forecasts.   This  is of  great concern                                                               
because a  100,000-barrel a day  drop in production relates  to a                                                               
decline of $500  million in state revenue.  He  showed a chart of                                                               
historic  production  from  the  Alaska  North  Slope  and  of  a                                                               
precipitous decline  in production forecasts.   He said  he tried                                                               
to outline  the current reality of  the North Slope, and  with no                                                               
investment,  the fields  will  decline at  15  percent per  year,                                                               
ending the "business"  at about 2015.  He said  he talked about a                                                               
future where  production would decline  about 6 percent  per year                                                               
with an  ongoing investment of $1  to $1.5 billion, which  is the                                                               
current  investment  in  the  North  Slope.   At  that  rate  the                                                               
business would  be over in  2020/2030.   He said a  three percent                                                               
decline  would require  doubling  today's  investments, and  that                                                               
would extend the business out to  2050, and it would keep the oil                                                               
business  healthy  under  a  timeframe  that  would  support  gas                                                               
[development].   He said the  real question that  the legislature                                                               
should be  asking the industry is:  what would it take  to double                                                               
investment in the North Slope?                                                                                                  
2:35:58 PM                                                                                                                    
CO-CHAIR RAMRAS said  he is taking some offense  from the content                                                               
of today's  testimony.  He  said he  is hearing that  "what makes                                                               
Alaska  worthwhile to  invest in  is not  the reasonable  profits                                                               
that are  gleaned by the  industry as  we move through  the 20/20                                                               
PPT that has  to happen at reasonable oil  prices-not at stressed                                                               
oil prices."   He said  he sat through  many meetings on  the gas                                                               
line and discussed  the stressed price of gas.   And now we have,                                                               
really, over the last three  or four weeks, started talking about                                                               
the stress  price of  oil--$20, $22.50 was  represented to  us as                                                               
the stress price of oil for  BP at which it becomes break-even or                                                               
less than  break-even.   And I  accept that.   I  am not  here to                                                               
quarrel with  that figure, although  I respect some of  the other                                                               
members for calling that figure  into question.  But we certainly                                                               
determined  that $30  and $40  are  reasonable; that  we may  see                                                               
those  again;  that  $50-all  the economists  told  us  that  $50                                                               
certainly represents the high, high  side of any planning that an                                                               
oil company could do.  So  I'm finding myself, over the last hour                                                               
and a  half...beginning to  take some  offense at  the suggestion                                                               
that when  we start  to see  high oil prices,  that that  is what                                                               
justifies industry  being here;  it is not  the profit  that they                                                               
enjoy  at reasonable  oil  prices, but  it's  the opportunity  to                                                               
capitalize on the  enormous profits the come when oil  is in this                                                               
upper quadrant... [at]  record highs."  Co-Chair  Ramras said his                                                               
question  to Mr.  Walker is:  "At  what point,  on a  progressive                                                               
scale, does  the industry  want to share  the windfalls  with the                                                               
State  of Alaska  in  some progressive  mechanism.   What's  your                                                               
point?  We  went all the way  out to $50 [per barrel]  in our CS.                                                               
We  covered  the  whole  range  of  economic  models  that  every                                                               
presenter...made.  At what point do you want to share?"                                                                         
2:39:16 PM                                                                                                                    
MR. WALKER said BP is not in  favor of a progressive regime.  "We                                                               
do not believe  it is the right  regime for Alaska.   Alaska is a                                                               
very  tough place  to  do business.    We make  no  money at  low                                                               
prices; we  make moderate  profits at  moderate prices,  but when                                                               
prices are  high we make good  profits, but we have  to make good                                                               
profits to be in business."                                                                                                     
2:39:41 PM                                                                                                                    
TOM WILLIAMS, Tax  Counsel, BP Alaska, said he has  a question of                                                               
what people  think are  windfall profits.   In March,  1980, BP's                                                               
predecessor, Sohio, had  a long-term West Coast price  of $33 per                                                               
barrel and  they raised their  price through December, "so  it is                                                               
not  a flash  in  the pan  price; that's  $75  in today's  buying                                                               
power.  Where does the windfall start?"                                                                                         
MR.  WALKER said  he is  presenting  a reality  and is  seriously                                                               
concerned about  what is coming  out of this committee,  and "all                                                               
we can do is be honest with you."                                                                                               
2:41:11 PM                                                                                                                    
REPRESENTATIVE KAPSNER said  she has heard that at  $18 dollars a                                                               
barrel, the industry still invests in Alaska.                                                                                   
MR. WALKER said  the industry invests through the low  cycle.  He                                                               
said, "We stop making  a profit at $22.50."  If  the price of oil                                                               
went to  $20 a  barrel, BP  would continue  to invest  in ongoing                                                               
projects because the  prices should go up.  Alaska  is one of the                                                               
most  expensive places  to produce  oil and  gas, so  the profits                                                               
have to be made.                                                                                                                
2:42:25 PM                                                                                                                    
REPRESENTATIVE GATTO  asked if BP  lost money worldwide at  $22 a                                                               
2:42:52 PM                                                                                                                    
MR. WALKER  said Alaska is one  of the most expensive  places, so                                                               
the break-even point comes at a higher price.                                                                                   
REPRESENTATIVE GATTO asked about the price on average.                                                                          
MR. WALKER said he doesn't have an answer.                                                                                      
2:43:32 PM                                                                                                                    
MR. WALKER  said encouraging  new exploration  is good  but those                                                               
resources will  likely be less than  the known resources.   It is                                                               
investment in the known resource  that offers the greatest chance                                                               
of stemming the decline of the  Alaska North Slope.  He suggested                                                               
growing  the  pie rather  than  increasing  state take  from  the                                                               
declining pie.                                                                                                                  
MR. WALKER showed  a slide in an attempt to  show how growing the                                                               
pie by  incentivizing investment is  in the best interest  of the                                                               
state over  the long term.   The capital investment to  make that                                                               
happen is significant,  he stated.  He showed  different rates of                                                               
decline  in  oil production  on  his  graph.   Calculating  state                                                               
revenue, the  graph shows that  3 percent  provides significantly                                                               
higher  revenue  to  the  state,  regardless  of  the  amount  of                                                               
severance tax; revenue is driven by royalties and other taxes.                                                                  
MR. WALKER said that a zero  severance tax rate would be a better                                                               
outcome  for  the state  than  a  high  severance tax  with  less                                                               
resource development.                                                                                                           
2:47:07 PM                                                                                                                    
REPRESENTATIVE  GATTO said  at a  15 percent  decline rate,  "you                                                               
invest $1  billion and you get  $10 billion; is that  $10 billion                                                               
for the state and $30 billion to the company?"                                                                                  
MR. WALKER said only the revenue to the state is represented.                                                                   
REPRESENTATIVE GATTO said  if there is $10 billion  to the state,                                                               
that  would only  be one  quarter  of the  pie.   So  during a  6                                                               
percent decline there  is $30 billion to the state,  "but it took                                                               
you $20 billion...invested  to increase the state  revenue by $20                                                               
billion,  which  means,  to  me,   that  the  company...is  doing                                                               
substantially  better."   He said  that is  an incredibly  larger                                                               
investment and  it looks like  the more invested, the  poorer the                                                               
return to  the company.  He  said it is confusing.   "Getting $60                                                               
billion more in  state revenue requires a  $60 billion investment                                                               
on your company, and that must mean  that you have to look at the                                                               
$60 billion investment," and ask what you are getting for it.                                                                   
2:49:11 PM                                                                                                                    
MR. WALKER said he didn't do  a good job of explaining the chart.                                                               
In each  case he is taking  the business as it  exists today with                                                               
all the  historic capital that has  been invested.  "If  we don't                                                               
invest  anything, then  that production  will  flow, provided  we                                                               
continue to make the expenditures  and operating costs, etc."  He                                                               
said that in the six percent  decline case, BP would have to make                                                               
an  investment of  $1 billion  to $1.5  billion per  year in  new                                                               
wells and  facilities.   The next graph  shows the  total capital                                                               
needed  by all  of the  oil industry  over a  number of  decades.                                                               
From that derives the production and  the revenue in all forms of                                                               
taxation, he  said.   His point  is that  what really  matters is                                                               
barrels down the pipeline, and  pushing the severance tax too far                                                               
is the wrong answer.                                                                                                            
2:51:56 PM                                                                                                                    
REPRESENTATIVE GATTO  said the  state is much  better off  at the                                                               
slow  decline, but  it will  take a  significant investment.   He                                                               
asked if it is a better deal [than the other scenarios].                                                                        
2:53:39 PM                                                                                                                    
MR. WALKER  said the  state is  on a  trajectory of  six percent.                                                               
Pushing PPT  too high  will be a  bigger loss to  the state.   He                                                               
said the  real opportunity is to  get to a three  percent decline                                                               
and enable gas.  There can't  be a gas contract without a healthy                                                               
oil business.                                                                                                                   
2:54:35 PM                                                                                                                    
REPRESENTATIVE GATTO  asked if the  six percent decline  is ideal                                                               
for BP.                                                                                                                         
MR. WALKER  said the  six percent  decline is  "where we  are and                                                               
where we  have been with the  existing tax system.   We have been                                                               
very clear  in our testimony  that the new  tax system is  a huge                                                               
additional  burden  to  us,  the major  producers  on  the  North                                                               
Slope."   He  said  the state  and  BP should  be  looking for  a                                                               
solution to the decline.  It could be stimulated by lower taxes.                                                                
REPRESENTATIVE GATTO said that is what we are trying to do.                                                                     
2:55:55 PM                                                                                                                    
MR. WALKER suggested lowering taxes to stimulate activity.                                                                      
CO-CHAIR  RAMRAS  said the  graphs  assume  $40  ANS, and  he  is                                                               
frustrated.   In helping to craft  this CS "we were  so cautious"                                                               
to provide  a safe harbor for  a whole range of  prices where the                                                               
industry does  its economic  planning.  "We  are well  outside of                                                               
$40 ANS."   He  said he  is struggling with  the notion  that the                                                               
committee  left  the governor's  PPT  intact  through that  whole                                                               
suite of prices.   The industry is making a  mistake to stand its                                                               
ground on this point  and will lose a lot of  the goodwill in the                                                               
body.  He said he is  struggling with constituents, the press and                                                               
other members that  it "is giving away the farm  not to trigger a                                                               
progressive scale at  $40 or $45...You had me at  $50, but I keep                                                               
seeing these  references to assuming  $40 ANS...At what  point do                                                               
you want  to share the wealth,  the windfall?"  He  said he hears                                                               
the oil companies  saying they do all their planning  at $40 ANS,                                                               
but unless  they get  all the  profits out there  at $50  or even                                                               
$70, it's  not worth  it to  them to operate.   "I  am struggling                                                               
with the  posture that  you are taking  because you're  losing my                                                               
2:58:39 PM                                                                                                                    
MR. WALKER said  he used $40 as an illustration.   The only thing                                                               
that matters  to Alaskans  is getting oil  down the  pipeline, he                                                               
said, and that  is in the best  interest of the industry.   He is                                                               
sorry for  being a broken  record, and  his point of  view hasn't                                                               
2:59:22 PM                                                                                                                    
CO-CHAIR  RAMRAS said  that  is  not the  message  the public  is                                                               
giving to  him.  He  said he is trying  to steward a  course that                                                               
balances  more  oil versus  more  taxes.    He  said it  is  more                                                               
important to  him to have  oil in the pipe,  but there has  to be                                                               
some point where the industry is  happy to share.  Every time the                                                               
industry came  in here it talked  about the price of  oil in that                                                               
range.   He and  his Co-Chair  came to a  consensus to  provide a                                                               
safe harbor  for the industry,  and it  troubles him to  have the                                                               
industry say  that $50  is not  good enough;  there should  be no                                                               
3:00:44 PM                                                                                                                    
MR. WALKER  said to remember  where the 20/20  was born.   BP was                                                               
very clear  when it  made a  deal with the  governor that  it was                                                               
taken right to the edge of what it was willing to share.                                                                        
3:01:18 PM                                                                                                                    
REPRESENTATIVE SEATON said the ELF has  been broken.  When BP was                                                               
getting  all of  those  tax  breaks, the  state  didn't see  $2-3                                                               
billion in  investments.  "The broken  ELF was giving you  all of                                                               
those tax  breaks and you  weren't doing those investments.   You                                                               
weren't doing them."  He said he  has a hard time with Mr. Walker                                                               
telling him if the state lowers  taxes toward the ELF amounts, it                                                               
will stimulate investment.  He  said everything the committee has                                                               
heard  from  BP  and  everything BP  has  demonstrated  from  its                                                               
investments  shows it  contributing to  the six  percent decline.                                                               
He  noted  that BP  said  it  will take  its  money  and take  it                                                               
somewhere else  unless it is  tied to  an investment credit.   He                                                               
said he  has a hard  time figuring out why  BP is saying  that at                                                               
lower  taxes  it  will  invest,   when  that  has  not  been  the                                                               
demonstration.  He noted that  BP's investment was small when ELF                                                               
was at  its very bottom,  "and all the  taxes were going  in your                                                               
pocket, you  weren't doing the investment  to get to a  3 percent                                                               
3:03:10 PM                                                                                                                    
MR. WALKER  said BP has been  investing $700 million per  year in                                                               
capital.   He said  BP can't say  the exact  relationship between                                                               
tax  and  investment,  and  that is  where  he  sympathizes  with                                                               
everybody  in the  capitol building.    He said  the industry  in                                                               
totality is investing $1-1.5 billion  annually at the current tax                                                               
structure.   The  laws  of economics  say  that increasing  taxes                                                               
makes Alaska less  competitive.  "You will have  to struggle even                                                               
harder."  He said a capital  credit structure is good and the PPT                                                               
has merit, but the numbers just need to be right.                                                                               
3:04:35 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD said  he  has heard  testimony on  total                                                               
government take, and  on the average "Alaska  looks pretty good."                                                               
Once the oil is discounted  for quality of crude, transportation,                                                               
and production costs,  the state would be average  worldwide at a                                                               
65 percent take.   Under the original bill, Alaska  oil has a 57-                                                               
59  percent government  take,  which would  mean  that the  state                                                               
would be leaving  billions on the table over the  long term.  Oil                                                               
production has been  on a six percent decline with  low taxes, so                                                               
he asked  if the state  should look at  something else.   He said                                                               
explorers  say the  cost of  facilities access  and the  pipeline                                                               
tariff are keeping  them from exploring on the North  Slope.  Low                                                               
taxes haven't seemed to work in the past, he noted.                                                                             
3:07:07 PM                                                                                                                    
MR.  WALKER said  government take  will be  61 percent  under the                                                               
PPT.  It is 114 percent at $20  per barrel and 70 percent at $30.                                                               
Alaska  government take  is  very high;  compared  to the  United                                                               
States and Canada it is the highest by far, he stated.                                                                          
3:08:29 PM                                                                                                                    
REPRESENTATIVE CRAWFORD asked if  Mr. Walker is subtracting other                                                               
royalty  owners  in the  rest  of  the country.    It  has to  be                                                               
considered when comparing government take.                                                                                      
MR. WALKER said he will address it later.                                                                                       
REPRESENTATIVE OLSON asked if BP is going to Libya.                                                                             
MR. WALKER said he doesn't know.                                                                                                
REPRESENTATIVE OLSON  said at $75  to $80 per barrel,  Alaska oil                                                               
total take is less than 65  percent, and Libya's take is at least                                                               
90 percent.  Libya is a  third world country with better climate,                                                               
but with  a history of political  instability and nationalization                                                               
[of oil  industry].  "Everybody is  going over there to  pay a 90                                                               
percent take.   How can  you make more  money at 90  percent than                                                               
you can at 65 percent?"                                                                                                         
MR. WALKER said  he doesn't know what  is going on in  Libya.  He                                                               
said there  are some  regimes that  can afford  a high  tax rate,                                                               
like  Norway.   But  Norway  has a  wonderful  resource base  and                                                               
production  has been  growing in  Norway.   Norway can  afford to                                                               
have marginal tax  rates because people can still  make money due                                                               
to the quality of the resource base.                                                                                            
3:11:15 PM                                                                                                                    
REPRESENTATIVE  OLSON  said Mr.  Walker  is  comparing Alaska  to                                                               
other  fields  in  the  United  States,  and  no  state  has  the                                                               
potential  that Alaska  has, with  the exception  of the  Gulf of                                                               
MR. WALKER  said there is huge  potential in the Gulf  of Mexico.                                                               
No  one  has the  cost  structure  that  Alaska has.    "Alaska's                                                               
resources  are  challenged, and  the  fiscal  structure needs  to                                                               
enable  investment.    The  viscous  oil,  enhanced  recovery  of                                                               
existing  fields, distance  to market  and location  all adds  to                                                               
reduce Alaska's competitiveness, he opined.                                                                                     
3:12:18 PM                                                                                                                    
MR. WALKER said there is a  huge known resource in Alaska, but it                                                               
is technically  difficult.  Alaska  is one of the  most expensive                                                               
places to  operate.  With the  PPT, Alaska would become  the area                                                               
with the highest marginal tax rate  in the United States.  Higher                                                               
tax  rates  at  higher  prices  is  a  bizarre  regime  of  being                                                               
regressive at  low prices  and progressive at  high prices.   The                                                               
legislature  should  be attracting  industry,  not  make it  more                                                               
difficult.  He quoted a  consultant who said the United Kingdom's                                                               
government  take  was  "crazy  and   irresponsible.    The  gross                                                               
benefits  to  the  U.K.  government  go  way  beyond  direct  tax                                                               
revenues and royalties  received from the upstream  sector of the                                                               
petroleum industry."   He continued  reading the quote  that said                                                               
when take was reduced, "the  U.K. offshore became the most active                                                               
offshore province in the world.   Reducing the government take in                                                               
the following years managed to sustain that boon."                                                                              
MR.  WALKER  said he  couldn't  agree  more that  reducing  taxes                                                               
sustained an  economic boon.   It had a ripple  effect throughout                                                               
the country, he stated.  That is  a good role model, he said.  He                                                               
told  the committee  to  lower  the tax  rate  that the  governor                                                               
proposed in order  to "take an important step  towards creating a                                                               
healthy oil business, which will be  the foundation for gas."  He                                                               
suggested  that raising  taxes will  increase  state revenue  for                                                               
only one  or two years  and at a cost  to future production.   He                                                               
repeated his opposition to the proposed CS.                                                                                     
3:18:00 PM                                                                                                                    
MR. WILLIAMS said  the penalties and interest  on underpaid taxes                                                               
are  inappropriate  because  the federal  government  imposes  no                                                               
penalties if  a taxpayer settles up  on April 15.   He said self-                                                               
employed  people, like  farmers  and fishermen,  are required  to                                                               
make  estimated tax  payments, but  they can't  predict what  the                                                               
total will be for the year,  so they are not charged for interest                                                               
and penalties.   It  is exactly  the same  for oil  companies, he                                                               
said.  He said BP will have to  file taxes at the end of February                                                               
when it knows its gross value,  but it won't know what the year's                                                               
total of  capital or  operating cost  will be.   "We can  make an                                                               
estimate  about what  those will  be, but  often what  happens is                                                               
capital costs tend  to load up at  the end of the  year as people                                                               
try to get  things in service this year, so  for federal purposes                                                               
they  can take  tax  depreciation."   He  asked  what happens  if                                                               
somebody  is late  in delivering  something  that BP  needs.   He                                                               
said, "You  can suddenly find  yourself there in  November having                                                               
expected to have a 20  percent credit for the capital expenditure                                                               
that was going to be put in  and arrive in December, and now it's                                                               
not going to happen until January."   There will be a penalty and                                                               
an interest  on that optimism, he  stated.  He said  the original                                                               
discussion recognized  that people will  do the best they  can to                                                               
estimate what  the costs will  be.  The  90 percent figure  is to                                                               
keep people  honest and reasonable,  but it wasn't the  idea that                                                               
BP had  to be  accurate in  forecasting the  full years  worth of                                                               
3:22:01 PM                                                                                                                    
CO-CHAIR RAMRAS said  he couldn't agree with him  more because he                                                               
is a small  business person subject to quarterly taxes.   He said                                                               
there are many  quarters where he overpaid due to  not being able                                                               
to forecast his obligations.   The provision arises from how much                                                               
the oil companies,  for the last 20 years,  "have manipulated the                                                               
accounting and how  much ill-will they have  created in requiring                                                               
the state to  pursue litigation in order to get  its fair share."                                                               
He said  he couldn't agree with  Mr. Williams more, but  there is                                                               
no goodwill  from the public,  and "these  are just the  seeds of                                                               
summers past that have come back to roost."                                                                                     
3:23:32 PM                                                                                                                    
MR. WILLIAMS  said despite the  large tax settlements,  the large                                                               
royalty settlements,  and the huge  litigation, if one  takes out                                                               
the interest, the  oil companies paid over 95 percent  of the tax                                                               
and royalty  liability they owed  at the time  it was due.   Even                                                               
though the settlements  were billions of dollars,  they were less                                                               
than 5  percent of the principal.   He said he  understands there                                                               
is a  public perception that  the legislators have to  deal with,                                                               
but "the public are mistaken."                                                                                                  
3:24:13 PM                                                                                                                    
CO-CHAIR  SAMUELS  said  BP,  ConocoPhillips  Alaska,  Inc.,  and                                                               
ExxonMobil Corporation  know exactly how  much they are  going to                                                               
pay.  "You  are the king of  one of the departments  and you know                                                               
exactly how much  you're going to pay."   He said that  it is the                                                               
much smaller  players that tend to  have the problems.   He asked                                                               
why  this  will  be  a  problem  for BP,  or  if  it  is  just  a                                                               
philosophical opposition.                                                                                                       
3:25:23 PM                                                                                                                    
MR. WILLIAMS said it is flattering to  be told it is easy for BP.                                                               
He  said two  people  manage  the accounting  for  the number  of                                                               
barrels coming out of the ground  and whether they are taxable or                                                               
not.   There  are  others  who make  sure  the  data are  entered                                                               
properly.   "We have a system  that we have been  able to perfect                                                               
over the years."   Taxes are filed  electronically with computers                                                               
summing the numbers.  He said the change is the problem.                                                                        
3:26:58 PM                                                                                                                    
MR.  WALKER summarized  and repeated  his  points.   He said  the                                                               
proposed amendments  to HB488 will  not maximize the  benefits to                                                               
Alaskans  for oil  or gas.   He  repeated the  U.K. example.   He                                                               
urged the committee to lower the tax rate on oil and gas.                                                                       
3:28:45 PM                                                                                                                    
REPRESENTATIVE SEATON asked if BP wants  the state to look at the                                                               
U.K. with regard to high taxes  on legacy fields and low taxes on                                                               
exploratory fields.                                                                                                             
3:29:06 PM                                                                                                                    
MR.  WALKER said  the U.K.  was a  marvelous example  of reducing                                                               
taxes across the board, which stimulated investment.                                                                            
REPRESENTATIVE SEATON asked about  the problem of late deliveries                                                               
and  the  capital  costs.     "Do  you  not  incur  your  capital                                                               
costs...until the barge hits Prudhoe Bay?"                                                                                      
3:29:55 PM                                                                                                                    
MR. WILLIAMS  said BP pays bills  when they come in,  but "if you                                                               
start  off  in  January  and you're  expecting  something  to  be                                                               
finished by the  end of the year, and let's  say it's being built                                                               
in the Gulf  of Mexico and there's a strike  or a hurricane...and                                                               
delays it,  we're not going be  paying."  He suggested  the state                                                               
pay the  oil companies interest  on overpayments.   Severance tax                                                               
has worked in the past, he said.                                                                                                
3:31:16 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked  if capitalization  costs  will  be                                                               
written against  January tax from  the year  before.  He  said it                                                               
seems that there  is no problem "unless you're  trying to forward                                                               
capitalize and  forward credit...and  take them off  against your                                                               
first taxes."                                                                                                                   
3:31:42 PM                                                                                                                    
MR.  WILLIAMS said  BP's billings  are  costs as  they are  being                                                               
incurred.   He  said BP  can keep  track of  the checks,  but the                                                               
problem is  that in March, BP  only knows how many  checks it has                                                               
written through  the end  of February.   "If  we don't  write the                                                               
checks we expect  to write [from May to July],  we will find that                                                               
we  over-deducted  or  over-credited  ourselves  in  those  first                                                               
months of  production when we  filed our return.   And it  is too                                                               
late then because  if we didn't hit the 90  percent mark, each of                                                               
those months will have a penalty and interest."                                                                                 
3:32:35 PM                                                                                                                    
JOHN ZAGER,  General Manager,  Alaska Chevron,  said he  told the                                                               
committee three  things in  previous testimony  and none  of that                                                               
counsel  was retained  in the  proposed CS.   His  three previous                                                               
points were:  Cook Inlet was  different from the North  Slope and                                                               
should be  considered for  special treatment  under the  PPT; the                                                               
committee should  not "pull  all the  levers in  the bill  in the                                                               
same direction";  and, keep things  simple to avoid the  costs of                                                               
tracking the tax.                                                                                                               
MR. ZAGER  said he  would like  to applaud  "that we've  held the                                                               
line on the 20 percent base  tax rate."  The progressive tax rate                                                               
in  the CS  is  complex, and  he  asked for  a  much larger  step                                                               
function so that  "for every $5 increment, you  see a substantial                                                               
change."    He  said the  ANS  would  be  a  better marker.    He                                                               
questioned why  profits for gas would  be tied to an  oil marker.                                                               
He noted that  the price step at $50 has  no inflation component.                                                               
The $40 indexing price is inflated,  he said, so it would be fair                                                               
to  use  that  mechanism  on   the  $50  starting  price  on  the                                                               
progressivity.  He  said taking windfall profits  away lowers the                                                               
expected value  to investors.   He compared  the oil  industry to                                                               
fishing, and suggested that a  person wouldn't buy a fishing boat                                                               
if there  was a similar progressivity.   He said people  think of                                                               
the  windfalls as  free  money, but  it is  part  of the  overall                                                               
distribution of expected results.                                                                                               
MR. ZAGER said  the CS has a substantial hit  to Chevron's annual                                                               
deduction.  It's an increase in  taxes, he said, and it penalizes                                                               
the  companies that  have been  faithfully  investing in  Alaska,                                                               
"and now  we're being taxed  on those profits that  is benefiting                                                               
both the  state and  the companies."   Regarding  the exploration                                                               
enhancement,  he said,  "the choice  between [SB]185  and the  20                                                               
percent rate is not a big  value addition and that the credits on                                                               
the  back side  of this,  for  any investment  decision, is  very                                                               
important."    He  said  that  the  inclusion  of  the  costs  of                                                               
abandonment would  promote timely abandonment of  operations.  He                                                               
said the  state has benefited  from those assets for  many years,                                                               
so abandonment is a legitimate cost of production.                                                                              
MR. ZAGER  said the effective date  is an arbitrary move  to take                                                               
more money from the investors.   He spoke of the reduction in the                                                               
$73  million   allowance,  which  is  more   important  to  other                                                               
companies but is substantial.   The tax credit repurchase program                                                               
helps  a  few smaller  companies,  and  doesn't do  anything  for                                                               
Chevron.    He  shares  the  view that  5  percent  is  punitive,                                                               
especially when it  is layered on top of a  11 percent base rate.                                                               
He described it as an accounting issue without intended malice.                                                                 
3:41:39 PM                                                                                                                    
CO-CHAIR  SAMUELS  asked  if   Chevron  anticipates  selling  tax                                                               
MR. ZAGER said Chevron won't need  to sell credits.  "Our biggest                                                               
disappointment  of all  is that  the Cook  Inlet was  not at  all                                                               
recognized as  being distinct and  separate from the  North Slope                                                               
in terms of its profitability  and its unique and valued position                                                               
to the State  of Alaska."  He said  additional investments should                                                               
be  encouraged in  Cook  Inlet  to help  local  economies and  to                                                               
supply gas  to the area.   He said the four-year  capital program                                                               
in Cook Inlet will  be put in serious jeopardy under  HB 488.  He                                                               
said without  capital investment in  the Parker River  field, the                                                               
anchor field,  it could be gone  in four years, causing  the Cook                                                               
Inlet  oil industry  to  shrivel and  die  in the  not-to-distant                                                               
future.  The CS is lopsided in favor of the state, he concluded.                                                                
3:44:59 PM                                                                                                                    
CO-CHAIR SAMUELS said it is the start of a long process.                                                                        
3:45:30 PM                                                                                                                    
TIM  ENGLAND,  Senior  Manager,  Global  New  Ventures,  Talisman                                                               
Energy   Inc.,   said   his  group   searches   for   exploration                                                               
opportunities internationally.  He led  the entry into Alaska for                                                               
Talisman a few years ago,  and the company's current operation in                                                               
Alaska is  being "operated through  our FEX-LP subsidiary."   The                                                               
enterprise value of  Talisman is $23 billion, and  it has capital                                                               
investments of  $3 billion to $4  billion per year.   The company                                                               
operates  in North  America, the  North Sea,  Southeast Asia  and                                                               
other places.   He said it has invested over  $30 million in land                                                               
and  over $100  million in  drilling and  seismic acquisition  in                                                               
Alaska.   The cost of  drilling in Alaska  is $30 million  and is                                                               
probably  only  $6 million  in  Libya,  he  said.   A  commercial                                                               
discovery  in  Alaska  would  take  5  to  10  years  to  put  on                                                               
production, and  that is a  long time from initial  investment to                                                               
recouping the  investment; the front end  is risky.  He  said the                                                               
decision to  enter Alaska was  dependent on an  unchanging fiscal                                                               
regime.    He  said  the  company  has  to  accept  the  risk  of                                                               
volatility  and changing  costs, and  fiscal stability  is really                                                               
important, he  said.  The  proposed changes will have  impacts on                                                               
Talisman.    Exploration  will decline  even  with  the  proposed                                                               
incentives under the CS.   Investment dollars for Alaska will not                                                               
be able  to compete with other  countries, he noted.   Sadly, the                                                               
bonus bids will be reduced, he stated.                                                                                          
3:49:07 PM                                                                                                                    
CO-CHAIR  RAMRAS asked  what  oil prices  Talisman  used for  the                                                               
economic models for making the decision to come to Alaska.                                                                      
3:49:28 PM                                                                                                                    
JON  HANDFORTH, Manager,  International and  Frontier Operations,                                                               
Talisman  Energy, said  the  company  was using  $20  to $30  per                                                               
MR. ENGLAND  said that Talisman  invested in Alaska when  the WTI                                                               
was about $30 a barrel, "but,  you know, our exploration costs up                                                               
in  Alaska, we  underestimated by  about half  compared to  where                                                               
they are today."                                                                                                                
3:50:02 PM                                                                                                                    
MR. ENGLAND  said increasing  the take  after the  investment has                                                               
been made does not bode  well for promoting a stable environment.                                                               
Talisman is global  and has plans to invest heavily  in Alaska in                                                               
the near term.   He said the bill is not  catching the company by                                                               
surprise, but  it is going  in the wrong  direction.  He  said if                                                               
taxes are increased, potential resources  would have to be larger                                                               
to  attract investment  dollars.   The chance  of finding  larger                                                               
resources  is  smaller than  finding  the  small resources.    If                                                               
Alaska's  taxes are  increased,  more  oil will  be  left in  the                                                               
ground, he concluded.                                                                                                           
3:51:44 PM                                                                                                                    
CO-CHAIR RAMRAS asked  what price Talisman uses  for its modeling                                                               
MR. HANDFORTH said anywhere from $20 to today's price.                                                                          
MR. ENGLAND  said there are  cycles, but he is  anticipating that                                                               
the price is going to stay  positive, but the worry is that costs                                                               
are rising at  an equal rate as oil prices,  especially in remote                                                               
areas.   He said he  is looking for  the investment cash  to find                                                               
some resources to develop in Alaska.                                                                                            
3:53:22 PM                                                                                                                    
RICHARD OWEN, Production  Manager, ExxonMobil Corporation Alaska,                                                               
and Vice  President of ExxonMobil  Alaska Production, said  he is                                                               
concerned about the  CS, and most points have  been covered well.                                                               
He said HB  488 represented a dramatic increase in  the tax rate,                                                               
and  it  could  prevent  some  challenged  resources  from  being                                                               
developed.  Now  the committee is considering a  higher tax rate.                                                               
He said too  high of a tax rate discourages  investment.  He said                                                               
companies  only take  the risk  of long-term  capital investments                                                               
when  there  is  an  opportunity   for  an  upside  potential  of                                                               
increased production, larger reserves  or higher prices.  Capping                                                               
the  benefits  of  the  upside   reduces  the  attractiveness  of                                                               
investments.    The   high  tax  base  rate  will   result  in  a                                                               
recalibration  of decisions,  and it  will result  in a  negative                                                               
impact on the state's economy.                                                                                                  
3:56:55 PM                                                                                                                    
CO-CHAIR RAMRAS  said the  state will  participate in  the reward                                                               
side, but through  the PPT the state is at  risk of oil reverting                                                               
back to lower  prices.  "When you suggest the  model is not built                                                               
on  sharing at  the higher  end, you  are not  acknowledging that                                                               
through PPT, the  State of Alaska is offering to  reduce risk for                                                               
the industry  at the lower  prices by sacrificing the  status quo                                                               
through the  current Elf system.   "Why  isn't that part  of your                                                               
MR. OWEN  said increasing the tax  to 20 percent was  the balance                                                               
for the low side.  The CS goes beyond the original proposal.                                                                    
3:58:55 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that Mr.  Owen said the CS  caps the                                                               
upside potential,  but it is  not capping anything; at  the price                                                               
of  $150  per barrel,  the  state  splits  the profits  with  the                                                               
industry.  "You're not calling that capping, are you?"                                                                          
MR.  OWEN said  to  a  large extent  it  is  reducing the  upside                                                               
potential,  not   capping  it.    The   transition  provision  is                                                               
necessary to  mitigate the adverse impact  on recent investments,                                                               
he said.   The benefits of a typical oil  and gas investment take                                                               
many  years  to  realize,  and the  governor's  bill  provided  a                                                               
reasonable transition  provision.   The CS does  not sufficiently                                                               
address the significant  increase in the tax burden.   He said he                                                               
is prepared  to move forward  with the governor's  proposal since                                                               
it sought  to provide the  balance of  revenues to the  state and                                                               
the producers  across a range  of prices and  provided incentives                                                               
for  exploration and  development  risks.   Most importantly  for                                                               
Exxon, oil fiscal contract terms  will provide the predictability                                                               
to go  forward with  the gas project  to the next  phase.   It is                                                               
important  that the  quality of  the  resources and  the risk  of                                                               
producers be factored  in to the tax system, he  stated.  He said                                                               
the  industry needs  predictability  and  durability, which  gets                                                               
lost at too high a cost.                                                                                                        
[HB 488 was held over]                                                                                                          

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