Legislature(2011 - 2012)BARNES 124

02/07/2011 01:00 PM RESOURCES

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01:03:31 PM Start
01:04:06 PM HB110
02:52:52 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Presentations: TELECONFERENCED
- Introduction of Bill by Administration
- "The Structure of ACES," by Dept. of Revenue
              HB 110-PRODUCTION TAX ON OIL AND GAS                                                                          
1:04:06 PM                                                                                                                    
CO-CHAIR  FEIGE  announced that  the  only  order of  business  is                                                              
HOUSE  BILL  NO.  110,  "An Act  relating  to  the  interest  rate                                                              
applicable to  certain amounts due  for fees, taxes,  and payments                                                              
made  and  property  delivered   to  the  Department  of  Revenue;                                                              
relating  to the  oil and  gas production  tax  rate; relating  to                                                              
monthly installment  payments of estimated oil and  gas production                                                              
tax; relating  to oil and gas  production tax credits  for certain                                                              
expenditures,    including   qualified    capital   credits    for                                                              
exploration,   development,  and   production;  relating   to  the                                                              
limitation  on  assessment  of   oil  and  gas  production  taxes;                                                              
relating  to  the determination  of  oil  and gas  production  tax                                                              
values;  making  conforming  amendments;   and  providing  for  an                                                              
effective date."                                                                                                                
CO-CHAIR FEIGE  stated that  the issue of  oil and gas  production                                                              
tax  is important  for the  future  of Alaska.   If  no action  is                                                              
taken  now, he  said, there  is a  good possibility  that in  less                                                              
than 10 years the  oil flow will be too low to  operate the Trans-                                                              
Alaska  Pipeline System  (TAPS).   With little  oil production  to                                                              
tax, the state will  be forced to look elsewhere  for its revenue.                                                              
Many people  feel this issue should  be addressed now  rather than                                                              
later and HB  110 is a good  start for this debate,  he continued.                                                              
The committee's objective  is to ensure that HB 110  will put more                                                              
oil  into  TAPS   and  encourage  new  exploration   and  enhanced                                                              
recovery  methods.   The federal  government  continues to  create                                                              
more obstacles to  resource development in Alaska,  he opined, and                                                              
action must  be taken  by the state  to keep  oil flowing  in TAPS                                                              
until federal agencies  change direction and promote  domestic oil                                                              
production.   The recent shutdown of  TAPS was a warning  that the                                                              
state's financial  independence is  tied to the  flow of oil.   He                                                              
said the committee  will wait to make any substantive  changes, if                                                              
any, to  HB 110  until it  hears from  the Department of  Revenue,                                                              
the  governor's  office, producers,  explorers,  contractors,  and                                                              
the general public.                                                                                                             
1:06:35 PM                                                                                                                    
BRYAN  BUTCHER,   Acting  Commissioner,  Department   of  Revenue,                                                              
introduced HB 110,  noting that the bill would  change the state's                                                              
tax system  to make  Alaska more  competitive both nationally  and                                                              
globally, produce  more jobs for  Alaskans, and increase  Alaska's                                                              
oil production.   Recent articles  project that North  Dakota will                                                              
surpass  Alaska  in oil  production  and  are  a wakeup  call,  he                                                              
continued.    The  federal government  has  deterred  onshore  and                                                              
offshore  development   in  the   state;  Alaska  must   therefore                                                              
maximize production on  state lands.  Many of the  tax credits and                                                              
incentives  passed by  the  legislature over  the  past few  years                                                              
have helped, but production continues to decline.                                                                               
ACTING COMMISSIONER  BUTCHER advised there  is much oil yet  to be                                                              
produced in  Alaska.  Thus, the  main objectives of HB  110 are to                                                              
develop currently  unexplored  fields and  to get more  production                                                              
out  of the  "Prudhoe and  Kuparuk" legacy  fields that  currently                                                              
provide  over 80  percent  of the  state's  oil  production.   The                                                              
issue of  oil production  is important,  he continued,  because 85                                                              
percent of  state revenues  come from oil.   Last month's  leak at                                                              
Pump Station  1 shut down  TAPS for a couple  of days.   This leak                                                              
was another  wakeup call because  today the pipeline  carries only                                                              
one-third the  volume it did  20 years  ago and there  was concern                                                              
that the pipeline would freeze up from the shut down.                                                                           
1:09:27 PM                                                                                                                    
ACTING COMMISSIONER  BUTCHER  pointed out  that developing  oil on                                                              
the North Slope  is much more challenging  now than it  was in the                                                              
past  - for  both  the  state and  producers.    The bulk  of  the                                                              
easiest to  produce oil has  been produced.  Therefore,  attention                                                              
is now  on viscous/heavy  oil, developing  areas that  have little                                                              
or no  infrastructure, and  developing smaller  pools of oil.   He                                                              
related that Governor  Parnell is not focused on  growing the size                                                              
of state  government; rather  the governor  is focused  on growing                                                              
the  size of  the private  sector  economy in  Alaska, which  will                                                              
provide more  jobs for Alaskans.   While the executive  branch has                                                              
its opinion on  what constitutes reasonable change,  industry will                                                              
have to weigh  in about what the  changes proposed by  HB 110 will                                                              
mean to industry's view of investment and exploration in Alaska.                                                                
ACTING COMMISSIONER  BUTCHER said  the three  goals of HB  110 are                                                              
to  address   progressivity,  promote  infield  drilling   in  the                                                              
currently  producing legacy  fields, and  promote the  development                                                              
of new  fields (slide  3).  Alaska's  oil tax  regime needs  to be                                                              
changed to make  Alaska more competitive nationally  and globally,                                                              
to create  more jobs for Alaskans,  and to increase  production in                                                              
the Trans-Alaska Pipeline System (slide 4).                                                                                     
1:11:31 PM                                                                                                                    
ACTING   COMMISSIONER   BUTCHER   discussed  the   North   Slope's                                                              
declining  production, noting  that  production  peaked in  Fiscal                                                              
Year (FY) 1988 at  just over 2 million barrels per  day (slide 5).                                                              
By  FY 2010  production  decreased to  about  644,000 barrels  per                                                              
day, a 68  percent decline that  has averaged about 5  percent per                                                              
year.   Over the  next 20 years  the decline  rate is  expected to                                                              
flatten to  between 3 and  4 percent, he  reported.   This decline                                                              
rate  is based  upon expected  production from  the new  Oooguruk,                                                              
Nikaitchuq, and  Liberty fields.  What  the state does  in the out                                                              
years will have  a large say over whether the decline  steepens or                                                              
flattens out.   He added that  another issue with less  barrels of                                                              
oil in TAPS  is that tariff costs  will be more because  the costs                                                              
of transportation  are divided  by the  number of barrels  flowing                                                              
through  the pipeline.   The  fewer  the barrels,  the higher  the                                                              
cost; the higher  the cost, the less profit the  state receives on                                                              
its royalty barrels.                                                                                                            
ACTING  COMMISSIONER  BUTCHER  reviewed  the  expected  production                                                              
from  old and  new  fields  (slide  6).   He  noted that  by  2020                                                              
approximately half  of the projected  oil production will  be from                                                              
new fields,  meaning 50  percent of  the projected oil  production                                                              
must come  from current fields.   Therefore, he continued,  HB 110                                                              
has provisions for both unexplored and current legacy fields.                                                                   
1:14:31 PM                                                                                                                    
ACTING   COMMISSIONER   BUTCHER   warned   that  the   number   of                                                              
exploration wells  is declining, according  to the Alaska  Oil and                                                              
Gas  Conservation   Commission  (AOGCC)  and  the   Department  of                                                              
Natural  Resources (DNR)  (slide 7).   Between  2005 and 2007  the                                                              
number of  exploratory wells drilled  each year increased  [from 7                                                              
to 18]  as the price  of oil increased,  but each year  since 2008                                                              
the number  has declined despite the  price of oil staying  in the                                                              
range of  $80-$90 per barrel.   Only three exploration  wells were                                                              
drilled  in  2010 and  DNR  expects  one  exploration well  to  be                                                              
drilled in 2011.                                                                                                                
ACTING COMMISSIONER  BUTCHER  reviewed the  total number  and type                                                              
of wells  that have  been drilled  on the  North Slope  (slide 8).                                                              
He  pointed  out that  the  total  number of  currently  producing                                                              
wells has  decreased a  little, but in  general has  stayed fairly                                                              
level  [131 wells  in  2005,  110 in  2010].   He  explained  that                                                              
service wells [38  wells in 2005, 33 in 2010] are  drilled for the                                                              
purpose of  supporting production  in the  field, and  include gas                                                              
injection, water  injection, and oil  development wells.   He drew                                                              
attention  to the number  of exploration  wells [7  in 2005,  3 in                                                              
1:16:09 PM                                                                                                                    
ACTING  COMMISSIONER  BUTCHER  related  that  annual  surveys  are                                                              
conducted  by   the  Frasier  Institute   to  judge   the  overall                                                              
attractiveness  of the world's  oil and  gas jurisdictions  [slide                                                              
9, entitled  "Frasier:  Alaska is  #68 of 133 in terms  of overall                                                              
attractiveness"].    The  survey asks  seventeen  questions  about                                                              
possible   barriers  to   investment,  including   infrastructure,                                                              
environmental   protection,  resource   potential,  and   the  tax                                                              
system.   This slide depicts a  composite index of the  17 aspects                                                              
of competitiveness  used to rank each jurisdiction,  he explained.                                                              
The  bars  on  the  graph  indicate  the  percentage  of  negative                                                              
responses for each  jurisdiction - the blue color  within each bar                                                              
represents  the  percentage  of  responses  that  said  there  are                                                              
moderate  barriers   to  investment,  yellow   represents  extreme                                                              
barriers, and  green represents  the percentage of  companies that                                                              
said they would  absolutely not invest in that  jurisdiction.  The                                                              
overall  negative response  for Alaska  was about  40 percent,  he                                                              
specified,  which puts  Alaska in  about the  middle of the  pack.                                                              
Alaska ranks worse  than other North American  jurisdictions, such                                                              
as Alberta  and North  Dakota, and  ranks worse  than Norway.   He                                                              
pointed out that  these surveys are somewhat subjective,  but said                                                              
they help  show in  general terms  how the  companies view  Alaska                                                              
relative  to other  states  and  countries.   Acting  Commissioner                                                              
Butcher  further elaborated  that  the most  difficult  investment                                                              
climates tend  to exist  in other continents,  such as  the Middle                                                              
East, Asia, and  Venezuela in South America (slide  10).  In North                                                              
America, Alaska  competes for capital dollars from  North American                                                              
companies  as well as  multi-national corporations,  yet  falls in                                                              
the same [third] quintile as China, Egypt, and Pennsylvania.                                                                    
1:18:44 PM                                                                                                                    
ACTING  COMMISSIONER  BUTCHER continued  discussing  the  [Frasier                                                              
Institute  2010 Global  Petroleum Survey],  reporting that  Alaska                                                              
ranks  31 out  of 38  jurisdictions  in North  America for  fiscal                                                              
attractiveness  (slide 11).    Those states  near  and worse  than                                                              
Alaska in attractiveness  are typically high tax  states, he said,                                                              
such as  New York,  Florida, and  California.  Expounding  further                                                              
(slide 12),  he said the least  attractive jurisdictions  in North                                                              
America are  Alaska, California,  Florida,  New York, Quebec,  and                                                              
Northwest  Territories.    The   high-producing  states  of  North                                                              
Dakota,  South  Dakota,  Texas,  and  Louisiana  [most  attractive                                                              
quintile]  rank considerably  better for  investment climate  than                                                              
Alaska  [third quintile].    Paraphrasing  from the  2010  Frasier                                                              
report, he said:                                                                                                                
     Seven  U.S.  states  and  regions  (New  York,  Florida,                                                                   
     California,  the  Atlantic Offshore,  Alaska,  Kentucky,                                                                   
     and  Pennsylvania)  had  relatively  unattractive  third                                                                   
     quintile  scores.     Investors  were   concerned  about                                                                   
     environmental    regulations    in   each    of    these                                                                   
     jurisdictions,  except  for   Alaska  where  the  fiscal                                                                   
     regime is also an issue.                                                                                                   
1:20:59 PM                                                                                                                    
ACTING  COMMISSIONER   BUTCHER,  in  response   to  Representative                                                              
Gardner, returned to  slide 9 and reiterated that  the blue within                                                              
each  bar on  the  graph represents  the  percentage of  companies                                                              
that  said a  jurisdiction has  moderate  barriers to  investment,                                                              
yellow  represents  extreme  barriers  to  investment,  and  green                                                              
represents absolutely  will not invest  in that jurisdiction.   He                                                              
specified  that the  least attractive  jurisdictions are  Bolivia,                                                              
Venezuela,  Russia,   Ukraine,  and   Iran,  all  of   which  have                                                              
political upheaval  that makes investment  extremely risky.   Most                                                              
attractive  are  South  Dakota,   Texas,  Illinois,  Wyoming,  and                                                              
Austria, he added.                                                                                                              
ACTING  COMMISSIONER   BUTCHER,  in  response   to  Representative                                                              
Munoz,  said  he  does  not  have   a  breakdown  on  whether  the                                                              
production  in other  states is  from state or  federal land,  but                                                              
will get that information and provide it to members.                                                                            
1:22:52 PM                                                                                                                    
ACTING  COMMISSIONER BUTCHER,  regarding  how Alaska  is rated  in                                                              
the Frasier  report for  specific investment  factors (slide  13),                                                              
said  Alaska's strengths  include  geopolitical  risks, the  legal                                                              
system  process, and  other things  related to  the U.S. having  a                                                              
stable environment  in which  to do  business.   Alaska is  in the                                                              
middle of  the pack  in terms of  commercial environment,  quality                                                              
of infrastructure,  and labor  availability.  Alaska's  weaknesses                                                              
include    environmental   regulations,    cost   of    regulatory                                                              
compliance,  uncertainty  concerning   protected  areas,  disputed                                                              
land claims,  and the tax regime.   Alaska can do  something about                                                              
its tax  regime, he  added.   Expounding further,  he pointed  out                                                              
that 44  percent of  survey respondents  said Alaska's  tax regime                                                              
deters investment  (slide 14).   The  negative impact  of Alaska's                                                              
tax system  is probably understated,  he continued,  because small                                                              
exploration  companies like Alaska's  generous credit  provisions,                                                              
while  the larger  companies  that  produce the  most  significant                                                              
amount of  oil and pay state  taxes have a different  perspective.                                                              
Alaska  has steep  progressivity,  he  pointed out.    At low  oil                                                              
prices,  say  $30-$40  per  barrel,   Alaska  would  score  better                                                              
because  the  state's   tax  would  then  be   comparatively  low.                                                              
However, at  today's high  oil price of  $90 per barrel,  Alaska's                                                              
unique progressivity method increases the tax on industry.                                                                      
1:26:02 PM                                                                                                                    
ACTING  COMMISSIONER BUTCHER  said  the Frasier  report ranks  the                                                              
attractiveness  of  Alaska's tax  regime  at 34  of  the 38  North                                                              
American jurisdictions  (slide 15).   He  related that  25 percent                                                              
of  respondents  said  Alaska's   tax  regime  is  encouraging  to                                                              
investment,  which  suggests the  state  has done  a  good job  of                                                              
marketing  to some  oil and  gas  companies, such  as the  smaller                                                              
explorers that  have received  cash for some  of the  tax credits.                                                              
However, Alaska  has discouraged  large companies that  invest and                                                              
produce from the state's major fields.                                                                                          
ACTING  COMMISSIONER  BUTCHER  illustrated   the  subjectivity  of                                                              
jurisdictional  ranking by  directing  attention to  a 2010  study                                                              
conducted by Wood  Mackenzie Research and Consulting,  which ranks                                                              
Alaska's  fiscal  attractiveness   at  129  of  141  jurisdictions                                                              
worldwide  (slide 16).   He pointed  out that  the Wood  Mackenzie                                                              
study  places  Alaska   at  the  negative  end   along  with  such                                                              
countries as  Venezuela and  Algeria.  He  included this  slide in                                                              
his presentation,  he said, because the legislature  is looking at                                                              
purchasing a detailed study from Wood Mackenzie.                                                                                
1:27:31 PM                                                                                                                    
ACTING  COMMISSIONER BUTCHER  directed attention  to a  Department                                                              
of Natural  Resources  map depicting  areas of  heavy oil  and gas                                                              
development and  areas that Governor  Parnell has talked  about in                                                              
recent speeches (slide  17).  The areas being talked  about by the                                                              
governor are  located just  south of the  Kuparuk and  Prudhoe Bay                                                              
fields  and  they  have had  very  little  exploration  in  recent                                                              
years,  he said.   The  administration  believes there  is a  high                                                              
chance of  finding new  fields once  opportunities and  incentives                                                              
are given to companies  to explore such areas, he  related.  Since                                                              
hitting the  huge field  of Prudhoe  Bay 40  years ago,  he added,                                                              
companies  have  put most  of  their exploration  and  development                                                              
dollars into it because the field is known.                                                                                     
ACTING  COMMISSIONER  BUTCHER  said   the  Department  of  Revenue                                                              
believes there  is a lot  of oil left in  Alaska (slide 18).   The                                                              
cumulative  production  through  2010  has been  over  16  billion                                                              
barrels.    The  department believes  the  remaining  North  Slope                                                              
reserves  exceed  5-7  billion   barrels,  he  reported,  and  the                                                              
geology-based  estimates of  total  oil volumes  are much  higher.                                                              
For  example,  the   department  does  not  include   any  of  the                                                              
approximately 20  billion barrels in the Ugnu  deposit or offshore                                                              
volumes from the Chukchi or Beaufort Seas in its forecast.                                                                      
1:30:18 PM                                                                                                                    
CHERYL   NIENHUIS,  Petroleum   Economic   Policy  Analyst,   Tax-                                                              
Administration,   Department   of    Revenue,   in   response   to                                                              
Representative  Wilson,  understood  the  Ugnu  deposit  to  be  a                                                              
fairly  large  deposit  underlying   several  North  Slope  units,                                                              
primarily  the  Prudhoe  Bay  and   Kuparuk  units.    In  further                                                              
response,  she understood  the deposit  to be  shallower than  the                                                              
Prudhoe Bay and Kuparuk deposits.                                                                                               
FRANK   MOLLI,   President,   Molli   Computer   Services,   Inc.,                                                              
Consultant   to   Department   of    Revenue,   in   response   to                                                              
Representative  Gardner, explained  that the  Ugnu deposit  is not                                                              
included  in the department's  forecast of  remaining North  Slope                                                              
reserves because,  at this point,  there has not been  a sustained                                                              
test or  proof of production.   Until he  sees that,  he hesitates                                                              
to put it  into the Department of  Revenue forecast, he  said.  In                                                              
response  to further  questions  from Representative  Gardner,  he                                                              
said industry  is attempting to  produce the Ugnu deposit,  but to                                                              
date  there  has not  been  a successful  method  of  significant,                                                              
sustained  production.    This  is because  the  Ugnu  deposit  is                                                              
composed of heavy  oil that does not easily flow  toward the wells                                                              
that are drilled.                                                                                                               
1:33:40 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
1:34:03 PM                                                                                                                    
MS.  NIENHUIS recapped  how Alaska's  oil taxes  work (slide  19).                                                              
Prior to  2006 oil  and gas  were taxed  under a gross  production                                                              
tax, she said.   In April 2006  the oil tax was  restructured with                                                              
passage  of the  petroleum profits  tax (PPT),  which changed  the                                                              
tax system  to a net  of the cost  of production.   Alaska's Clear                                                              
and  Equitable Share  (ACES)  was passed  in  2007.   Most of  its                                                              
provisions became effective  on July 1, 2007, the  start of Fiscal                                                              
Year (FY)  2008, although some  provisions were retroactive.   The                                                              
two major  components  of ACES are  a net  production tax,  rather                                                              
than a gross  tax, and tax  credits for various activities  in oil                                                              
and gas production on the North Slope.                                                                                          
1:38:25 PM                                                                                                                    
MS.  NIENHUIS  discussed  the  various  terms  used  in  the  ACES                                                              
production  tax (slide  21).   She  explained  that  the point  of                                                              
taxation is  at the  North Slope wellhead.   The "wellhead  value"                                                              
is the West  Coast market price  less the cost of getting  the oil                                                              
and/or  gas to  the West  Coast.   The  "gross value  at point  of                                                              
production"  is the  wellhead value  multiplied by  the number  of                                                              
barrels produced.   The "production tax value" (PTV)  is the gross                                                              
value  at the  point  of production  minus  the  upstream cost  to                                                              
produce  the oil  and/or gas.   The  upstream cost  can be  broken                                                              
down into  capital  and operating  expenses.   Thus, the basis  of                                                              
the oil tax is like a net income.                                                                                               
MS. NIENHUIS, in  response to Co-Chair Feige, understood  that the                                                              
dividing line  between upstream and  downstream is Pump  Station 1                                                              
[on the Trans-Alaska  Pipeline System (TAPS)], although  there are                                                              
some feeder pipelines.                                                                                                          
MS.  NIENHUIS,  in response  to  Representative  Munoz,  confirmed                                                              
that  upstream cost  includes  the cost  of  employees.   Upstream                                                              
cost is the direct cost of producing oil and gas, she said.                                                                     
1:40:22 PM                                                                                                                    
MS. NIENHUIS  continued her discussion  of terms, noting  that the                                                              
"base tax  rate" under ACES  is 25 percent  of the  production tax                                                              
value (PTV),  but under the petroleum  profits tax (PPT)  the base                                                              
tax rate  was 22.5 percent.   The "progressive surcharge  rate" is                                                              
a  formula-driven  rate  that  increases   as  oil  profits  grow.                                                              
"Credits"  are  also  a part  of  ACES.   She  said  credits  were                                                              
started  prior to  PPT, were  expanded during  PPT, were  expanded                                                              
even more during  ACES, and she believes more  credits were passed                                                              
last year.                                                                                                                      
MS. NIENHUIS  explained that  the ACES base  tax is  calculated by                                                              
multiplying  the production  tax  value (PTV)  by  the 25  percent                                                              
base tax rate  (slide 22).  A progressive surcharge  is calculated                                                              
by  multiplying  the  production  tax  value  by  the  progressive                                                              
surcharge rate.   The progressive surcharge rate is  the amount of                                                              
tax, in  addition to  the base  rate, that  is applied  on profits                                                              
per barrel  above $30.   The  base tax  and progressive  surcharge                                                              
are added together  and then the credits are  subtracted to arrive                                                              
at the total production tax owed to the state.                                                                                  
1:42:57 PM                                                                                                                    
MS.  NIENHUIS demonstrated  how  the  projected Fiscal  Year  (FY)                                                              
2012 production  tax  would be calculated  (slide  23).  She  said                                                              
that at the forecast  price of $82.67 per barrel  and the forecast                                                              
production  of  622,182  barrels  per  day,  the  value  is  $51.4                                                              
million per  day.  This daily value  is multiplied by  365 days to                                                              
arrive at  the annual production  value [$18.7 billion].   Royalty                                                              
barrels  are  then subtracted  to  arrive  at the  annual  taxable                                                              
production/value [192,426,540  barrels/$15.9 billion].   Next, the                                                              
marine  transportation costs,  TAPS  tariff, and  other costs  are                                                              
subtracted to  arrive at the gross  value at point  of production.                                                              
From  here  the total  lease  expenditures  (deductible  operating                                                              
expenditures  forecast  at  about   $2.5  billion  and  deductible                                                              
capital  expenditures   forecast  at   about  $2.5   billion)  are                                                              
subtracted  to  arrive  at the  forecasted  production  tax  value                                                              
(PTV)  of $9.6  billion.   The  base  tax rate  of  25 percent  is                                                              
multiplied by  the production  tax value to  arrive at a  base tax                                                              
of $2.4  billion.   The progressive tax  rate, calculated  here at                                                              
8.1 percent, is  multiplied by the production tax  value to arrive                                                              
at  a  progressive  tax  of  $785 million.    [The  base  tax  and                                                              
progressive tax are  added together], so the total  tax due before                                                              
credits is $3.2  billion.  The projection for credits  in FY 12 is                                                              
$450 million.   Thus,  the total projected  tax after  credits for                                                              
FY 12 is  about $2.7 billion.   She cautioned, however,  that this                                                              
is a  very simplified,  averaged view of  the calculation  for the                                                              
production tax.                                                                                                                 
1:46:10 PM                                                                                                                    
MS. NIENHUIS, in  response to Representative P.  Wilson, confirmed                                                              
that lease expenditures are considered upstream costs.                                                                          
MS. NIENHUIS,  in response  to Representative Kawasaki,  confirmed                                                              
that  at the  projected  FY 12  oil value  of  $18.7 billion,  the                                                              
state will  receive $2.7 billion.   In further response,  she said                                                              
the  deductible  capital  expenditures are  projections  that  the                                                              
state receives  from the companies.   Twice a year the  state asks                                                              
the companies  to forecast their  projected expenditures  for five                                                              
years  out and  the figures  used  in this  example  are the  most                                                              
recent forecast.                                                                                                                
1:48:03 PM                                                                                                                    
MS. NIENHUIS  reviewed the tax  credits currently  available under                                                              
ACES   (slide  24),   explaining  that   the  "qualified   capital                                                              
expenditure  credit"  is  an  automatic   20  percent  credit  for                                                              
qualified capital expenditures.                                                                                                 
The   committee   took   a  brief   at-ease   due   to   technical                                                              
MS.   NIENHUIS  continued,   noting  that   a  qualified   capital                                                              
expenditure  credit of 40  percent was  passed by the  legislature                                                              
last year  for well  lease expenditures  outside the North  Slope.                                                              
She explained  that the  "carried-forward  annual loss credit"  is                                                              
primarily  for  producers  that   are  spending  money  developing                                                              
fields but  do not yet have  income exceeding their  expenditures;                                                              
these producers  are given  a 25 percent  credit for that  loss in                                                              
the following year.                                                                                                             
MS. NIENHUIS  said the  "small producer  and new area  development                                                              
credit" is  a non-refundable  credit that can  only be  applied in                                                              
the year  the producer  can use  it.   Companies with  North Slope                                                              
production  of less  than  100,000  barrels a  day  can receive  a                                                              
credit  of  [up  to]  $12 million  [per  year].    Companies  with                                                              
production outside  the North  Slope and Cook  Inlet of  less than                                                              
100,000 barrels [a  day] can receive a credit of  up to $6 million                                                              
per year.  She  added that the credit ramps up  between 50,000 and                                                              
100,000 barrels and there is a formula.                                                                                         
MS. NIENHUIS,  in response to  Representative Kawasaki,  agreed to                                                              
provide members  a list of  those producers with  production rates                                                              
below 100,000 barrels a day.                                                                                                    
MS.  NIENHUIS, in  response to  Representative  Gardner, said  she                                                              
believes  the $12 million  credit  and the $6  million credit  are                                                              
additive, so a company can receive both.                                                                                        
1:51:26 PM                                                                                                                    
MS. NIENHUIS  returned to her  review of credits,  explaining that                                                              
the "alternative  credit  for exploration"  has been a  relatively                                                              
attractive credit  for companies  exploring in remote  areas where                                                              
exploration is quite  expensive.  This credit is 30  or 40 percent                                                              
depending  on  whether  the exploration  meets  certain  criteria.                                                              
Prior to ACES this credit was 20 and 30 percent.                                                                                
MS. NIENHUIS explained  that the "Cook Inlet jack-up  rig credit,"                                                              
passed [in  2010], provides  credit of up  to 100 percent  for the                                                              
first three  exploration wells  that are  drilled using  a jack-up                                                              
rig in Cook Inlet.                                                                                                              
MS. NIENHUIS,  in response  to Representative  Kawasaki,  said she                                                              
would provide members  with a listing of federal  credits that are                                                              
available  to companies,  but that  she is  unsure the  department                                                              
can provide company-specific information in this regard.                                                                        
1:52:54 PM                                                                                                                    
MS.  NIENHUIS, in  response to  Representative Gardner,  confirmed                                                              
that no companies  have yet qualified for the  jack-up rig credit,                                                              
given  it was  just passed  this  last spring.   However,  several                                                              
companies are competing to do so.                                                                                               
ACTING  COMMISSIONER  BUTCHER  added  that the  first  company  to                                                              
bring a  jack-up rig  to Cook  Inlet will  receive 100  percent of                                                              
the  cost up  to $25  million.   The  second jack-up  rig must  be                                                              
brought up by a  different company and that credit  would be up to                                                              
90 percent  or $22.5 million, and  the third jack-up rig  would be                                                              
up to  80 percent  or $20  million.   If the  drilling results  in                                                              
sustained  production, 50  percent  of the  credit  would be  paid                                                              
back over a 10-year period.                                                                                                     
ACTING  COMMISSIONER  BUTCHER,  in  response  to  Co-Chair  Feige,                                                              
confirmed  that two  companies  are seriously  discussing  jack-up                                                              
1:53:59 PM                                                                                                                    
MS.  NIENHUIS, in  response to  Representative Herron,  understood                                                              
that the  $12 million and  $6 million credits  were passed  by the                                                              
legislature to encourage  development of new fields.   She said it                                                              
takes some time  for small producers to get to the  point of where                                                              
income  exceeds  expenses.   In  further  response, she  said  she                                                              
would look at  the legislative history and provide  information to                                                              
members about  why the  particular dollar  amounts of  $12 million                                                              
and $6 million were chosen.                                                                                                     
1:55:19 PM                                                                                                                    
MS. NIENHUIS  provided  examples of  how the  tax and the  credits                                                              
affect the  different types of producers.   For the  first example                                                              
she used a new  entrant with no current production  in Alaska that                                                              
is  pursuing an  exploration  project  requiring  $200 million  in                                                              
investment  (slides 25-26).   Depending  on  whether that  project                                                              
meets  certain  criteria,  she  said the  state  would  give  this                                                              
company a  credit of 20,  30, or 40  percent, which would  be $40-                                                              
$80 million in tax  credit for this size project.   If the company                                                              
were to experience  a loss it would  be eligible for a  25 percent                                                              
net operating  loss tax  credit, which  could be  worth up  to $50                                                              
million.   Thus,  for  this $200  million  investment the  company                                                              
could receive  a credit of $90-$130  million from the state.   The                                                              
credit could  be directly recouped  from the state  via refundable                                                              
tax credits  or the credit  could be transferred  to a  company in                                                              
the state  that does pay  tax.  Regardless  of whether  the credit                                                              
is  directly refunded  or transferred,  she  explained, the  state                                                              
would pay $90-$130  for the exploration and the  company would pay                                                              
$70-$110  million.    The  state  therefore  bears  the  risk  for                                                              
failure,  as does  the new  entrant,  because the  state does  not                                                              
recoup this money even if the exploration effort fails.                                                                         
1:57:46 PM                                                                                                                    
MS. NIENHUIS,  in response  to Representative  P. Wilson,  allowed                                                              
that  $200 million  is high  for just  an exploration  well.   The                                                              
exploration tax  credit was set  at 40 percent, she  said, because                                                              
exploration  costs can be  very high  depending upon the  distance                                                              
from existing infrastructure.                                                                                                   
1:59:19 PM                                                                                                                    
MS. NIENHUIS  next provided  an example  of an incumbent  producer                                                              
that already has  current production to which a tax  credit can be                                                              
applied  (slides  27-28).    If  this  incumbent  pursued  a  non-                                                              
exploration  development  requiring  $200 million  in  investment,                                                              
she  said,  it  would receive  a  20  percent  capital  investment                                                              
credit of $40  million.  That capital investment  would reduce the                                                              
incumbent's  production tax  value (PTV),  which would reduce  the                                                              
taxes  due.  This  is because  the progressive  surcharge  rate is                                                              
triggered  off  the profit  per  barrel,  so if  expenditures  are                                                              
higher the  profit per barrel  is lower  and this would  lower the                                                              
tax rate.   The deductions  and credits  would total more  than 45                                                              
percent  (greater than  $90 million)  of  the $200  million.   The                                                              
state would therefore  be paying more than $90 million  of the new                                                              
development's  capital  cost,  meaning   the  incumbent  would  be                                                              
spending less than  $110 million.  Once again, the  state would be                                                              
an investor  in the project  and would  bear the risk  for failure                                                              
as would the incumbent investor.                                                                                                
2:01:16 PM                                                                                                                    
MS. NIENHUIS  summarized the key  points of tax and  credits under                                                              
the ACES  system (slide  29).  For  credits, the  state can  cut a                                                              
check  [to new  entrants]  or reduce  the  tax  liability owed  by                                                              
incumbents.   In both cases  the state  is an investor  and shares                                                              
the risk  with the company  doing the project.   She said  the aim                                                              
of ACES  is to  incentivize investment  through the state  bearing                                                              
risk and reducing  the costs incurred by explorers  and producers.                                                              
Tax  credits  and  the  net-based  structure  make  the  state  an                                                              
investor in exploration and new development activities.                                                                         
MS.   NIENHUIS,  in   response  to   Representative  P.   Wilson's                                                              
recollection that the  average number of dry wells is  5 out of 6,                                                              
agreed the  state is  sharing a  lot of  the risk  and cost.   Tax                                                              
credits have increased,  she allowed; for example, in  FY 2010 the                                                              
state  paid about  $250  million in  tax credits.    She said  she                                                              
thinks the  belief at the time ACES  was passed was that  this was                                                              
a trade-off the state could bear.                                                                                               
2:03:15 PM                                                                                                                    
MS.  NIENHUIS,  in  response  to  Representative  Dick,  said  she                                                              
believes  other  states  also  provide  incentives,  although  she                                                              
could not say whether  they are of the same magnitude  as those in                                                              
Alaska.  Also, she added, there are federal tax credits.                                                                        
MS. NIENHUIS, in  response to Representative Kawasaki,  nodded her                                                              
agreement to  provide committee  members with information  on what                                                              
the federal  tax credits  would be for  the examples  she provided                                                              
earlier (slides 26-28).                                                                                                         
2:04:08 PM                                                                                                                    
MS.  NIENHUIS, in  response  to  Representative Foster,  said  she                                                              
believes the Interstate  Oil and Gas [Compact]  Commission (IOGCC)                                                              
publishes the  tax rates and  incentives offered by  other states.                                                              
She agreed to provide members with this information.                                                                            
ACTING COMMISSIONER  BUTCHER cautioned that most  other states are                                                              
based on  gross and Alaska is  net, which makes it  complicated to                                                              
put together  an accurate comparison.   He said the  department is                                                              
putting together  a slide  to provide such  a comparison,  but was                                                              
unable to  have it  ready for today's  presentation.   In response                                                              
to Co-Chair Feige,  he agreed to put together a  comparison of the                                                              
top 10 states that Alaska is competing against.                                                                                 
2:05:47 PM                                                                                                                    
ACTING COMMISSIONER  BUTCHER said the main changes  proposed by HB                                                              
110  are  in  the  progressivity  rates,  the  tax  cap,  the  tax                                                              
calculation, the  tax credits, and  the base tax rate  (slide 31).                                                              
He explained  that HB 110  would define progressivity  as discrete                                                              
brackets rather than  a continuous function and,  like the bracket                                                              
system used  for federal  income tax,  the progressivity  would be                                                              
applied only to  the incremental revenue.  Under  current law, the                                                              
progressivity  rate is  0.4 percent  on each  dollar over  $30 per                                                              
barrel in  profit up  to $92.50  in profit,  and after  $92.50 the                                                              
progressivity  drops  to  0.1  percent   on  each  dollar.    This                                                              
increase in tax  percentage is on the entire barrel,  not just the                                                              
last  dollar,  which  at  high oil  prices  can  result  in  70-80                                                              
percent of  each increased dollar  in profit going  to government.                                                              
He  pointed out  that  the oil  industry  is  very high  risk/high                                                              
reward; for  example, "Shell" has  put $3 billion  into developing                                                              
the outer  continental shelf  and is at  risk of not  getting this                                                              
money  back.    The majority  of  exploration  is  not  productive                                                              
enough  to develop,  so when it  is productive  enough to  develop                                                              
the company must recoup those losses.                                                                                           
2:09:28 PM                                                                                                                    
ACTING COMMISSIONER  BUTCHER,  regarding the  tax cap, noted  that                                                              
state  taxes can  currently  go  up to  75  percent  on a  barrel.                                                              
Under HB  110 the tax  cap would be limited  at 50 percent  of the                                                              
profit  per  barrel for  legacy  fields  and  40 percent  for  new                                                              
fields.    The lower  tax  cap  for  new fields  is  to  encourage                                                              
exploration  and development  because the  taxes for those  fields                                                              
would be less.                                                                                                                  
ACTING  COMMISSIONER BUTCHER  said HB  110 proposes  a yearly  tax                                                              
calculation based  on average prices  and costs.   Currently, this                                                              
is done on  a monthly basis,  which has proven difficult  for both                                                              
industry  and the  Department of  Revenue.   A yearly  calculation                                                              
would be a more  simplified method.  Regarding the  base tax rate,                                                              
HB 110  would keep  the current  base rate  of 25 percent,  except                                                              
leases or  properties not producing  as of 12/31/2010 would  pay a                                                              
base rate of 15 percent.                                                                                                        
ACTING COMMISSIONER  BUTCHER noted  that the proposed  changes for                                                              
progressivity rates,  tax cap, tax calculation, and  base tax rate                                                              
would take effect  1/1/2013.  He pointed out that  due to the laws                                                              
changing from the  Economic Limit Factor (ELF) to the  PPT in 2006                                                              
and  then changing  again  at  the end  of  2007 under  ACES,  the                                                              
department is only  now catching up with its audits.   The passage                                                              
of  HB  110  would  be  the  third   law  change  in  five  years.                                                              
Therefore,  this  effective date  would  give the  department  the                                                              
opportunity to write the regulations and work out the kinks.                                                                    
2:12:03 PM                                                                                                                    
ACTING COMMISSIONER  BUTCHER further  explained that HB  110 would                                                              
allow  tax credits  to be  claimed in  the first  year instead  of                                                              
splitting the  credit into two years  as required by  current law.                                                              
This  change  would take  effect  on  1/1/2012  and would  have  a                                                              
negligible  effect  on the  state.    Additionally, HB  110  would                                                              
extend the  40 percent well lease  expenditure tax credits  to the                                                              
North Slope.   Given the expectation  that in 10 years  50 percent                                                              
of production  will be from  currently existing fields,  the state                                                              
needs to do  what it can to  help overcome the problem  of viscous                                                              
oil and other challenges in the existing fields.                                                                                
ACTING  COMMISSIONER BUTCHER,  in  response  to Representative  P.                                                              
Wilson,  said  the  tax  cap  is currently  at  75  percent.    In                                                              
response to  further questions from  Representative P.  Wilson, he                                                              
explained that under  HB 110 companies would still  make estimated                                                              
tax payments to  the state on a monthly basis,  but those payments                                                              
would be  based on the  rolling average  for the year.   Regarding                                                              
the base tax rate,  he said the proposed 15 percent  base tax rate                                                              
for oil  and gas coming  from leases  or properties  not producing                                                              
as of  12/31/10 would be in  permanent statute until  the governor                                                              
or legislature decided to make a change at a future date.                                                                       
2:15:31 PM                                                                                                                    
ACTING COMMISSIONER  BUTCHER, in response to  Representative Dick,                                                              
explained that a  unit is defined in statute as a  group of leases                                                              
covering  all or  part of an  accumulation  of oil  and gas.   The                                                              
lessees agree  to operate  the leases  as a  single unit  under an                                                              
approved plan  of exploration or  plan of development.   The basis                                                              
for  being  a unit  is  the  approved unit  agreement  which  gets                                                              
approved by  the appropriate agency,  which for state land  is the                                                              
Department of Natural  Resources and for federal land  is the U.S.                                                              
Bureau of Land Management.                                                                                                      
ACTING  COMMISSIONER  BUTCHER,  in  response  to  Co-Chair  Feige,                                                              
confirmed that a  "unitized" area is an area that  a company would                                                              
plan to put into production as opposed to exploration.                                                                          
2:16:50 PM                                                                                                                    
ACTING  COMMISSIONER   BUTCHER,  in  response   to  Representative                                                              
Munoz,   agreed   to   provide    members   with   estimates   for                                                              
infrastructure  costs to tie  pipelines from  new fields  into the                                                              
Trans-Alaska  Pipeline System,  along with  information as  to who                                                              
would pay those costs.                                                                                                          
REPRESENTATIVE  MUNOZ, in  response  to Co-Chair  Feige, said  she                                                              
imagines "the line  would need to be extended into  the new areas"                                                              
that have been talked about.                                                                                                    
CO-CHAIR  FEIGE responded  that  it would  depend  upon where  the                                                              
discovery was made.                                                                                                             
ACTING  COMMISSIONER BUTCHER  added that  he is  sure "Shell"  has                                                              
put a lot of  thought into what its costs will  be to connect with                                                              
the  Trans-Alaska  Pipeline System  from  the developments  it  is                                                              
looking at in the  Beaufort and Chukchi seas.   He reiterated that                                                              
he will see what information he can find on this type of cost.                                                                  
ACTING  COMMISSIONER   BUTCHER,  in  response   to  Representative                                                              
Herron, said  that when developing  HB 110 the department  did not                                                              
look  into  brackets  for  progressivity  as it  would  relate  to                                                              
declining production.   He explained  that the department  kept HB                                                              
110 on  the same curve  for progressivity  as currently  exists in                                                              
state law because  the department thought brackets  had more value                                                              
than tweaking the current law.                                                                                                  
2:19:57 PM                                                                                                                    
REPRESENTATIVE P.  WILSON asked how  much revenue the  state would                                                              
forego as a result  of these changes, although  she understood the                                                              
reason  for making  these proposed  changes  is to  get more  flow                                                              
through the Trans-Alaska Pipeline System.                                                                                       
ACTING COMMISSIONER  BUTCHER replied that the  department's fiscal                                                              
note estimates  a revenue  reduction of  approximately $5  billion                                                              
over  the next  five years,  which  does not  include the  revenue                                                              
increase that  the department expects  further out the  road after                                                              
the increased development  has occurred.  It is  very difficult to                                                              
try to  figure out,  he continued.   If the price  of oil  were to                                                              
reach $100 or  $110 [per barrel] for  two years in a  row, that $5                                                              
billion  would  be  gone  and  there   would  be  even  more  than                                                              
anticipated, and it  goes the other way if the  price drops lower.                                                              
He added  that the  Office of Management  & Budget (OMB)  projects                                                              
that at the  end of that five-year  period, the state  would still                                                              
have  significant reserves  in the  Constitutional Budget  Reserve                                                              
(CBR)  even with  a sizeable  increase  in state  government.   He                                                              
noted that the department will have details at a later date.                                                                    
2:21:59 PM                                                                                                                    
ACTING  COMMISSIONER  BUTCHER  returned to  his  presentation  and                                                              
addressed the  effective, nominal,  and marginal tax  rates (slide                                                              
32).   He  said the  effective tax  rate is  the tax  rate that  a                                                              
company  would  pay after  taking  out  tax credits  and  anything                                                              
else.  The nominal  tax rate is the rate in  statute; for example,                                                              
the 25 percent  base going up, but  it is not applied  in the real                                                              
world to  the pluses  and minuses  of tax  credits.  The  marginal                                                              
tax  rate is  a theoretical  rate that  would be  applied to  each                                                              
additional  $1  of profit;  for  example,  for higher  and  higher                                                              
potential profit  it would  be the amount  of government  take and                                                              
the  amount left  over  for the  producer.    As progressivity  is                                                              
currently  calculated,  the  higher  the  profit  the  higher  the                                                              
marginal tax, which can reach over 80 percent.                                                                                  
ACTING  COMMISSIONER BUTCHER,  in  response  to Representative  P.                                                              
Wilson,  further  explained  that  the  nominal tax  rate  is  the                                                              
number in the bill.   Under current law, for example,  the nominal                                                              
tax rate  is the base rate  of 25 percent  up to $30 a  barrel [in                                                              
profit]  after which  each  additional  dollar [in  profit]  would                                                              
increase the  tax rate by  0.4 percent, so  the tax would  be 25.4                                                              
percent, 25.8 percent,  and so on.  It is the tax  rate "on paper"                                                              
and  does not  include subtraction  of  tax credits.   In  further                                                              
response, he confirmed  that the nominal tax rate is  the tax rate                                                              
not counting all the pluses and minuses along the way.                                                                          
2:24:36 PM                                                                                                                    
ACTING  COMMISSIONER  BUTCHER  compared the  current  nominal  tax                                                              
rate under  ACES with that proposed  by HB 110 (slide  33).  Under                                                              
ACES the  nominal tax rate  is 25 percent  until a  production tax                                                              
value of $30 per  barrel is reached, at which point  the tax rises                                                              
in a continuous  0.4 percent per dollar until leveling  out at 0.1                                                              
percent  [when the  production value  reaches $92.50].   Under  HB                                                              
110,  the  base  rate on  production  from  current  fields  would                                                              
remain  at 25 percent  up to  a production  tax value  of $30  per                                                              
barrel, at  which point the  tax would  rise in brackets  until it                                                              
reached a tax cap  of 50 percent.  Under HB 110,  the base rate on                                                              
production from  new fields  would be 10  percent lower  and would                                                              
rise in brackets until reaching a tax cap of 40 percent.                                                                        
ACTING  COMMISSIONER BUTCHER  compared  the  current marginal  tax                                                              
rate  under  ACES  with  that  proposed  by  HB  110  (slide  34).                                                              
Starting at $30  per barrel in production tax  value, the marginal                                                              
tax rate  under  ACES is very  steep,  he said.   This is  because                                                              
each 0.4 percentage  per dollar applies to the  entire barrel, not                                                              
just that  next dollar.   At  [$92.50] per  barrel in  profit, the                                                              
ACES  tax   reaches  87  percent,   at  which  point   onward  the                                                              
progressivity drops  from 0.4 percent  per dollar to  0.1 percent.                                                              
Under the  bracketed system proposed  by HB 110, the  marginal tax                                                              
rate would increase  in bracketed steps, but it would  not rise as                                                              
steeply  as under ACES  because  the brackets  apply the tax  rate                                                              
only to the bracketed amount instead of to the entire barrel.                                                                   
2:27:10 PM                                                                                                                    
ACTING  COMMISSIONER BUTCHER,  in  response  to Representative  P.                                                              
Wilson, agreed  to provide one  graph depicting both  the marginal                                                              
and the  effective  tax rates so  that committee  members  can see                                                              
the difference  between the two.   He explained that  the marginal                                                              
tax rate  is what industry  looks at  when determining  whether to                                                              
develop a  field.   Each company  has its  own projections  on the                                                              
price of oil and  how it perceives the future, and  looking at the                                                              
marginal  tax rate  provides  an  indication of  the  high end  of                                                              
potential tax.   It  is the marginal  tax rate that  is seen  in a                                                              
negative  sense  when the  differences  between Alaska  and  other                                                              
jurisdictions are discussed.                                                                                                    
ACTING  COMMISSIONER   BUTCHER,  in  response   to  Representative                                                              
Herron, explained  that HB 110 would  cap the tax once  the profit                                                              
per barrel reaches  a certain level, rather than  provide a stair-                                                              
stepped decrease  in tax.  He  clarified that all three  tax rates                                                              
are based  on the production tax  value or profit per  barrel, not                                                              
the price  of oil.   The [$92.50]  cap is  the profit  per barrel,                                                              
not the price  per barrel.   On average, the subtracted  costs are                                                              
$25-30 per barrel.   Thus, the [$92.50] profit  represents a price                                                              
per barrel of about $120.                                                                                                       
2:29:46 PM                                                                                                                    
ACTING  COMMISSIONER BUTCHER,  in  response  to Representative  P.                                                              
Wilson, elaborated  further about the  cost per barrel  versus the                                                              
price  per barrel.   Because  the tax  is on the  profit, not  the                                                              
gross, what  is looked at  is the dollar  amount per  barrel times                                                              
the production  minus the  transportation, operating,  and capital                                                              
costs.    The total  of  these  three costs  averages  about  $30.                                                              
Therefore,  at a  price of  $90  per barrel  of oil,  less $30  in                                                              
production cost, the  profit is $60; therefore, tax  on the $60 in                                                              
profit is 40 percent.                                                                                                           
ACTING COMMISSIONER  BUTCHER, in response to Co-Chair  Feige about                                                              
whether there  is incentive  to control costs  under this  type of                                                              
tax regime,  said the lower the  spending that a company  has, the                                                              
higher the  profit.  Even though  the state would be taking  40 or                                                              
50 percent  of the profit, it  would still create more  profit for                                                              
the company  by reducing the  costs than  it would be  to increase                                                              
them.   He  offered  to  have the  department's  auditors  address                                                              
members about this issue at a later date.                                                                                       
2:32:07 PM                                                                                                                    
ACTING  COMMISSIONER  BUTCHER,  in  response  to  Co-Chair  Feige,                                                              
confirmed  that  the  Department  of Revenue  sets  the  costs  of                                                              
production and transportation.                                                                                                  
MS. NIENHUIS  pointed out  that the  cost for  each barrel  on the                                                              
North  Slope  can  be  different  because  the  crudes  come  from                                                              
different areas of  the state and the properties  are developed by                                                              
different companies.   So,  while the  department uses  an average                                                              
cost of  $26-$30 per  barrel, each property  can have  a different                                                              
amount than  that.   Thus, this tax  is really a  company-specific                                                              
tax  in  that  the  company's  tax  rate  and  tax  liability  are                                                              
determined by the taxes on the company and what it spends.                                                                      
2:33:03 PM                                                                                                                    
ACTING  COMMISSIONER  BUTCHER  returned to  his  presentation  and                                                              
compared the current  effective tax rates under ACES  on the gross                                                              
value  at the point  of production  with the  effective tax  rates                                                              
proposed by  HB 110 (slide  35).  He  said the effective  tax rate                                                              
under HB  110 would not  rise nearly as  quickly or as  steeply as                                                              
it currently  does under ACES,  and [the administration]  believes                                                              
this reduction would spur development.                                                                                          
ACTING  COMMISSIONER BUTCHER  concluded  by  reiterating that  the                                                              
current well  lease expenditure  credit under  ACES is  40 percent                                                              
outside of the North  Slope and 20 percent within  the North Slope                                                              
(slide 36).  He  said HB 110 proposes to increase  the North Slope                                                              
credit  from 20  percent to  40 percent  for capital  expenditures                                                              
directly related  to exploration wells, stratigraphic  test wells,                                                              
producing wells, and injection wells.                                                                                           
2:34:54 PM                                                                                                                    
MS.  NIENHUIS, in  response to  Representative Gardner,  described                                                              
the different  kinds of  wells, but  qualified that her  knowledge                                                              
of  the  different  kinds  of  wells is  limited.    She  said  an                                                              
exploration   well  is   presumably  pretty   far  from   existing                                                              
infrastructure.  She  understood  a  stratigraphic  test  well  is                                                              
drilled  to  determine and  delineate  the  various areas  of  the                                                              
reservoir.   A producing  well is  drilled to  produce oil  and an                                                              
injection  well injects  fluids into  a reservoir  to enhance  the                                                              
oil recovery.                                                                                                                   
ACTING  COMMISSIONER BUTCHER  added that  an injection  well  is a                                                              
service  well and  this type  of  well is  included under  service                                                              
wells on slide 8.                                                                                                               
MS.  NIENHUIS,  in further  response  to  Representative  Gardner,                                                              
explained that there  are tangible and intangible  drilling costs.                                                              
An intangible  drilling cost  is not a  physical asset;  rather it                                                              
is the cost of  engineering, labor, and other things  that go into                                                              
drilling a well.                                                                                                                
2:36:55 PM                                                                                                                    
CO-CHAIR  SEATON  asked whether  the  40  percent tax  credit  for                                                              
capital  expenditures   in  Cook  Inlet  has  been   effective  in                                                              
producing the expected rapid exploration and development.                                                                       
MS.  NIENHUIS replied  that  this tax  credit  is relatively  new,                                                              
having  been  put  in  place  in  spring  [2010];  therefore,  she                                                              
believes  the  department's  experience  with the  credit  is  too                                                              
short to be able to fully evaluate any effect.                                                                                  
MS. NIENHUIS,  in response to  Co-Chair Feige, offered  her belief                                                              
that wells have  been drilled by companies that expect  to get the                                                              
40 percent [qualified capital expenditure] credit.                                                                              
CO-CHAIR  FEIGE, regarding  the Frasier report,  asked what  other                                                              
factors besides  Alaska's fiscal structure  cause the state  to be                                                              
ranked in the middle in terms of competitiveness.                                                                               
ACTING COMMISSIONER  BUTCHER  responded that  it generally  has to                                                              
do with the U.S.  political system, which is stable  and seen as a                                                              
positive  compared   to  politically   volatile  countries.     He                                                              
suggested this  question be  asked of  industry members  when they                                                              
testify  before  the  committee  at  a  later  date  because  each                                                              
company has  a different  view of the  positives and  negatives of                                                              
investing in Alaska.                                                                                                            
2:39:40 PM                                                                                                                    
CO-CHAIR FEIGE asked  what the Department of Revenue's  record has                                                              
been on predictions versus what actually happened.                                                                              
ACTING COMMISSIONER  BUTCHER replied  that in terms  of production                                                              
the department has  tended to be optimistic.  He  said this has to                                                              
do  with  a  number  of  variables,  one  of  which  is  that  the                                                              
department's  forecasts  are based  on  the assumption  that  TAPS                                                              
will  be running  365 days  a year.   In  terms of  oil price,  he                                                              
allowed the  department has  been "all over  the place,"  but that                                                              
it  is thought  the  department has  improved  in these  forecasts                                                              
over the last few years.                                                                                                        
ACTING  COMMISSIONER   BUTCHER,  in  response   to  Representative                                                              
Kawasaki, nodded his  agreement to provide members with  a copy of                                                              
the 2010  Frazier report.  In  further response, he said  he would                                                              
provide  members with  what information  he can  in regard  to how                                                              
Alaska's position  of overall attractiveness  would be  shifted in                                                              
the Frazier report if Alaska were to have the best tax regime.                                                                  
ACTING  COMMISSIONER  BUTCHER,  in  response  to  Co-Chair  Feige,                                                              
confirmed that the  more attractive Alaska's tax  regime, the less                                                              
would be the state's revenue.                                                                                                   
2:42:13 PM                                                                                                                    
REPRESENTATIVE   KAWASAKI  asked   how   Alaska's  strengths   and                                                              
position in  the Frazier report  would be changed if  the billions                                                              
of dollars  in foregone tax revenue  were instead used  to punch a                                                              
road  to  Umiak  or  provide  infrastructure   that  improves  the                                                              
state's economy.   He  said he does  not think the  administration                                                              
has made  a case  that the tax  changes proposed  by HB  110 would                                                              
actually bring more jobs to the state.                                                                                          
ACTING  COMMISSIONER   BUTCHER  responded   that  for   today  the                                                              
department was  asked to  present a high  level explanation  of HB                                                              
110 as well  as to discuss  where the department thinks  the state                                                              
is  today.    He  said  the  department  will  be  providing  more                                                              
detailed  information   at  its   next  presentation   before  the                                                              
committee   and  these  details   may  provide   answers   to  the                                                              
aforementioned question.                                                                                                        
REPRESENTATIVE  GARDNER  posited that  in  addition  to the  state                                                              
doing  something  about  its  tax regime,  Alaska  could  also  do                                                              
something about  many of  the other  investment factors  listed on                                                              
slide  13.    For  example,  Alaska  could  do  a  lot  about  the                                                              
availability of  labor and the  quality of infrastructure  because                                                              
those are responsibilities of state government.                                                                                 
ACTING COMMISSIONER  BUTCHER agreed, but  said that for  today the                                                              
department was just focusing on what HB 110 had to do with it.                                                                  
2:44:30 PM                                                                                                                    
CO-CHAIR  SEATON inquired  whether  the Frasier  report has  moved                                                              
the producers  in Alaska  to make  significant investments  in the                                                              
five  most   attractive  jurisdictions   listed  on  slide   14  -                                                              
Illinois, Chile, Utah, Northern Territory, and Uruguay.                                                                         
ACTING COMMISSIONER  BUTCHER suggested  this question be  asked of                                                              
the  producers  directly  and  pointed  out  that  Alaska  has  no                                                              
control over what  states or countries are studied  by the Frasier                                                              
Institute.   He acknowledged  that just  because Illinois  has the                                                              
lowest and  most attractive  tax regime does  not mean there  is a                                                              
lot of activity in that state.                                                                                                  
CO-CHAIR SEATON  noted that the title  of slide 14 states  "44% of                                                              
respondents say  Alaska tax regime  deters investment."   He asked                                                              
whether  this means  that 56 percent  of respondents  did  not say                                                              
that Alaska's regime deters investment.                                                                                         
ACTING   COMMISSIONER  BUTCHER   replied   that   44  percent   of                                                              
respondents  in  the survey  specifically  pointed  out that  they                                                              
consider the  tax regime a  deterrent.  He  said he does  not know                                                              
whether 56 percent  said "not a deterrent at all."   He offered to                                                              
provide more information in this regard.                                                                                        
CO-CHAIR  FEIGE suggested  that maybe  the other  56 percent  were                                                              
not considering investing  in Alaska because they  are invested in                                                              
other places.                                                                                                                   
CO-CHAIR  SEATON  added  it  may   be  that  this  44  percent  of                                                              
respondents  are  not  considering  investing  in  Alaska  either,                                                              
given  this  is a  general  survey  which  makes it  difficult  to                                                              
interpret exactly what the response means.                                                                                      
2:47:27 PM                                                                                                                    
CO-CHAIR  SEATON  referenced the  nominal  tax rates  depicted  on                                                              
slide  33  and  asked  whether  it  is  the  stepped  increase  in                                                              
marginal  tax  rate  that  is  being addressed  by  HB  110.    He                                                              
surmised  that the  gestalt  is  about a  bracketed  tax like  the                                                              
[federal]  income tax  where the  lower tax  rate is  paid on  the                                                              
lower amount  of income and  the higher tax  rate is paid  only on                                                              
the  higher   amount  of   income  and   asked  whether   this  is                                                              
incorporated  into  the proposal.    He  noted that  slides  33-34                                                              
depict  the profit,  so the [average  production]  cost of  $26 is                                                              
below the  starting point  of $0 [in  production tax  value] shown                                                              
on the  graphs.   For example,  he said,  no barrels  of oil  were                                                              
produced  this   year  in  the   $0-$40  range,  which   would  be                                                              
equivalent  to the  [federal] income  tax of  where be  no tax  is                                                              
paid on the  first $10,000, and  the tax rate on the  next $10,000                                                              
would be at  15 percent, and so  on.  Under HB 110,  the tax would                                                              
be whatever  it averages for the  year rather than the  month.  He                                                              
questioned  whether the analogy  to an  income tax is  appropriate                                                              
because  it seems  to  him  that there  would  no  base amount  of                                                              
production  that is  taxed at  25 percent.   For  example, if  the                                                              
average [price]  this year is $82  [per barrel], the tax  would be                                                              
48 percent for  all of the oil,  none would be at 30  percent.  He                                                              
asked whether he is correct in this calculation.                                                                                
2:50:32 PM                                                                                                                    
ACTING  COMMISSIONER  BUTCHER  responded  that the  first  $30  of                                                              
profit per  barrel would be taxed  at 25 percent.  In  response to                                                              
further questions  from Co-Chair  Seaton, he  said that at  $50 of                                                              
profit  on the barrel,  $30  of the profit  would  be taxed  at 25                                                              
percent  and then  the $30-$50  of profit  would be  taxed at  the                                                              
bill's  proposed  bracketed  increases.   He  confirmed  that  the                                                              
bill's effective  tax rate would  be much lower than  it currently                                                              
is under ACES (slide 35).                                                                                                       
CO-CHAIR  FEIGE offered  his appreciation  for  the Department  of                                                              
Revenue's work on HB 110.                                                                                                       
[HB 110 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB110 Dept Revenue Fiscal Note.pdf HRES 2/7/2011 1:00:00 PM
HB 110
HB110 DNR Fiscal Note.pdf HRES 2/7/2011 1:00:00 PM
HB 110
Hearing Request HB110 production tax 20jan11.pdf HRES 2/7/2011 1:00:00 PM
HB 110
Section Analysis HB110 production tax 20jan11.pdf HRES 2/7/2011 1:00:00 PM
HB 110
Sectional Summary for HB110 by Leg. Legal.PDF HRES 2/7/2011 1:00:00 PM
HB 110
HB110 production tax transmittal letter 20Jan11.pdf HRES 2/7/2011 1:00:00 PM
HB 110
HB0110A.pdf HRES 2/7/2011 1:00:00 PM
HB 110
HB 110 Dept. Revenue Presentation.pdf HRES 2/7/2011 1:00:00 PM
HB 110