Legislature(2011 - 2012)HOUSE FINANCE 519

04/20/2012 01:00 PM RESOURCES


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01:06:08 PM Start
01:06:58 PM HB3001
03:06:21 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
In Participation with House ENE
*+ HB3001 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
- Presentation of the Bill by the Administration
- Introduction of Bill, Sectional, & Fiscal Note
by Commissioner Bryan Butcher & Deputy
Commissioner Bruce Tangeman, Dept. of Revenue
               HB3001-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
1:06:58 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of  business would                                                               
be HOUSE  BILL NO. 3001, "An  Act relating to adjustments  to oil                                                               
and  gas production  tax values  based on  a percentage  of gross                                                               
value at  the point of production  for oil and gas  produced from                                                               
leases  or  properties  north  of   68  degrees  North  latitude;                                                               
relating  to monthly  installment  payments of  the  oil and  gas                                                               
production tax;  relating to  the determinations  of oil  and gas                                                               
production tax  values; relating  to oil  and gas  production tax                                                               
credits  including  qualified  capital credits  for  exploration,                                                               
development,  or production;  making  conforming amendments;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
1:07:32 PM                                                                                                                    
                                                                                                                                
BRYAN BUTCHER,  Commissioner, Department of Revenue  (DOR), began                                                               
his presentation  by stating the  goals of HB 3001:   incentivize                                                               
production on  the North Slope  both within and  outside existing                                                               
units;  generate  additional jobs  and  activity  for the  Alaska                                                               
economy;  build   on  work  already  undertaken   in  legislative                                                               
committees  during the  regular  session;  maintain the  existing                                                               
structure  of  Alaska's Clear  and  Equitable  Share (ACES)  with                                                               
slight  modifications to  avoid major  changes in  tax structure;                                                               
and maintain  alignment of working  interest owners by  not tying                                                               
incentives  to  individual  companies.   He  explained  the  last                                                               
provision  dealt  with a  situation  that  arose with  previously                                                               
proposed   legislation  whereas   some  companies   received  tax                                                               
reductions,  and some  received  tax increases.    The five  main                                                               
provisions of  HB 3001 are:   30 percent gross  revenue exclusion                                                               
for calculating  a base  tax and  progressive tax  for qualifying                                                               
new North  Slope fields; 40  percent gross revenue  exclusion for                                                               
calculating   progressive tax  for existing,  currently producing                                                               
North Slope fields;  reduce the cap on the maximum  tax rate from                                                               
75  percent  to   60  percent;  extend  40   percent  well  lease                                                               
expenditure credit  to North  Slope -  currently the  North Slope                                                               
has a  20 percent credit  and the rest of  the state south  of 68                                                               
degrees  north  latitude  has  a 40  percent  credit;  and  allow                                                               
capital  credits to  be  redeemed  in the  year  they are  earned                                                               
because the  present schedule is  difficult for the cash  flow of                                                               
smaller companies, and is difficult to administer.                                                                              
                                                                                                                                
1:12:13 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER said  the governor  used a  hybrid approach                                                               
and  intended for  the bill  to utilize  proposals that  had been                                                               
previously  discussed,  such  as   the  gross  revenue  exclusion                                                               
introduced  in  the   Senate  Finance  Committee  as   a  way  to                                                               
incentivize production.   Furthermore, the production  tax cap of                                                               
60 percent was introduced by  the Senate Resources Committee as a                                                               
way to  limit state take  at high oil  prices.  In  addition, the                                                               
gross revenue exclusion  structure for new fields  was applied to                                                               
existing fields and taken to a  material level similar to that of                                                               
HB  110,   which  was  supported   by  oil  and   gas  companies.                                                               
Commissioner  Butcher noted  the Alaska  Oil and  Gas Association                                                               
(AOGA)  indicated HB  3001 is  meaningful tax  reform that  would                                                               
change investment in Alaska.   The last provision is an expansion                                                               
of the  well lease expenditure  credit introduced and  enacted in                                                               
2010 through the Cook Inlet Recovery Act.                                                                                       
                                                                                                                                
1:14:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  asked how percentages for  the exclusions,                                                               
rates, and credits were determined.                                                                                             
                                                                                                                                
COMMISSIONER BUTCHER  explained that  DOR agreed with  the Senate                                                               
Finance Committee on  the 30 percent gross  revenue exclusion for                                                               
new  fields.    However,  the   percentage  for  calculating  the                                                               
progressive tax was considered along  with other percentages.  He                                                               
restated that  the governor sees  the bill as a  hybrid, bringing                                                               
together  concepts and  inspiring  discussion  of many  different                                                               
approaches, such  as a more  gradual progressivity  curve, moving                                                               
the "trigger"  dollar amount, changes  to the base tax  rate, and                                                               
others.    The  bill  will  show  one of  many  ways  to  get  to                                                               
meaningful change.                                                                                                              
                                                                                                                                
1:17:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  clarified  that  the  30  percent  gross                                                               
revenue exclusion  on new oil  fields is  for 10 years,  and then                                                               
rolls over  to the  proposed 40  percent gross  revenue exclusion                                                               
for existing fields for an unlimited amount of time.                                                                            
                                                                                                                                
COMMISSIONER BUTCHER  said correct, and  he pointed out  that the                                                               
30 percent would reduce  the  face tax  and  progressive tax  for                                                               
new fields.                                                                                                                     
                                                                                                                                
REPRESENTATIVE GARDNER  requested that the responses  from DOR to                                                               
questions raised  by the  Senate also be  provided to  members of                                                               
House committees.                                                                                                               
                                                                                                                                
COMMISSIONER BUTCHER agreed.                                                                                                    
                                                                                                                                
CO-CHAIR SEATON asked for an explanation of the goal which read:                                                                
                                                                                                                                
      To maintain alignment of working interest owners by                                                                       
     not tying incentives to individual companies                                                                               
                                                                                                                                
COMMISSIONER  BUTCHER said  the intent  was to  take an  approach                                                               
that would not  lead to tax increases for some  companies and tax                                                               
decreases for others.                                                                                                           
                                                                                                                                
CO-CHAIR SEATON  questioned whether  allowing an equal  tax break                                                               
for companies - if they invest  or not - would defeat the purpose                                                               
of an incentive to production.                                                                                                  
                                                                                                                                
COMMISSIONER  BUTCHER  opined  incentivizing  production  may  be                                                               
DOR's goal, however, the department  did not want to make changes                                                               
detrimental  to some  companies.   He recalled  testimony that  a                                                               
consequence of the  legislation proposed by the  Senate may cause                                                               
a tax increase at current prices.                                                                                               
                                                                                                                                
1:20:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON encouraged  Commissioner Butcher to reinvestigate                                                               
this question.   He then called attention to  the provision which                                                               
read:                                                                                                                           
                                                                                                                                
      Extends 40 percent well lease expenditure credit to                                                                       
     North Slope                                                                                                                
                                                                                                                                
COMMISSIONER BUTCHER,  in response  to Co-Chair Seaton,  said the                                                               
well lease expenditure credits  include capital expenditures, and                                                               
replace the 20 percent credits  currently applicable on the North                                                               
Slope.                                                                                                                          
                                                                                                                                
CO-CHAIR  SEATON  expressed  his  belief  that  as  the  bill  is                                                               
written, 20  percent is not replaced  by 40 percent, but  adds 40                                                               
percent to 20 percent.                                                                                                          
                                                                                                                                
COMMISSIONER BUTCHER said, " ... we'll flesh that out."                                                                         
                                                                                                                                
REPRESENTATIVE KAWASAKI opined the key  provisions in HB 3001 are                                                               
a hodgepodge  of provisions from  HB 110, which passed  the House                                                               
but  not the  Senate, and  from SB  192, which  did not  pass the                                                               
Senate.  He  encouraged Commissioner Butcher to  explain how each                                                               
of the provisions taken from HB  110 and SB 192, and now included                                                               
in HB 3001, will advance the  state to its goals of incentivizing                                                               
new  production,   filling  [the  Trans-Alaska   Pipeline  System                                                               
(TAPS)], and getting more capital development.                                                                                  
                                                                                                                                
COMMISSIONER BUTCHER  advised the  presentation would  begin with                                                               
the general  concepts of the  bill, and  then go into  more depth                                                               
using a sectional  analysis.  The governor's intent  was to begin                                                               
with  a blend  of structures  that  have support.   For  example,                                                               
other  jurisdictions with  a progressivity  system use  brackets,                                                               
but because  using brackets was  not supported by the  Senate, HB                                                               
3001  uses   another  way  "to   get  to  what  we   thought  was                                                               
meaningful."                                                                                                                    
                                                                                                                                
                                                                                                                                
REPRESENTATIVE  KAWASAKI heard  testimony that  progressivity and                                                               
brackets were necessary  in any oil bill for it  to be considered                                                               
meaningful.    He  asked  whether  there  is  a  way  to  get  an                                                               
acceptable meaningful bill without those provisions.                                                                            
                                                                                                                                
COMMISSIONER BUTCHER  said the administration believes  it can be                                                               
done.    For clarity,  graphs  will  be presented  which  compare                                                               
projected tax revenue under ACES, HB 110, and HB 3001.                                                                          
                                                                                                                                
1:24:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PETERSEN observed  that the  proposed changes  to                                                               
the  tax  system are  based  on  the  premise  that ACES  is  not                                                               
working.  He  asked whether audits covering the  time period ACES                                                               
has been in  effect - the last  five or six years  - are complete                                                               
and available for review.                                                                                                       
                                                                                                                                
COMMISSIONER BUTCHER said  DOR has taken many years  to adjust to                                                               
the changes  to the regulations  brought by  ACES, as well  as to                                                               
the  switch  from a  gross  to  a net  tax.    Currently, DOR  is                                                               
comprehensively auditing the first year of  ACES - 2008.  He said                                                               
completion  of  the  audits  will  speed  up  now  and  that  the                                                               
department  is well  within its  statutory  deadlines.   However,                                                               
results of the  audits are confidential and will not  play a role                                                               
in this debate.                                                                                                                 
                                                                                                                                
REPRESENTATIVE  GARDNER recalled  HB  110  proposed reducing  the                                                               
time limit.  She  asked what the time limit would  be, had HB 110                                                               
passed, and whether DOR would still be within the limit.                                                                        
                                                                                                                                
COMMISSIONER  BUTCHER  said  yes.     Although  HB  110  proposed                                                               
reducing the time limit to four  years, the current time limit is                                                               
six years.   He further  explained that after each  regulation is                                                               
written and implemented by the  department, the companies have an                                                               
opportunity  to  submit   a  new  tax  return   specific  to  the                                                               
regulation, and the time limit begins  anew.  In most, if not all                                                               
cases, DOR  has received  the revisions  for 2008-2009,  thus has                                                               
remained under the statutory limit.                                                                                             
                                                                                                                                
1:27:57 PM                                                                                                                    
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner,  Office of the Commissioner,                                                               
DOR,  presented   slide  5  entitled,  "How   the  Gross  Revenue                                                               
Exclusion Works"  which is the  income statement format  from the                                                               
Tax  Division Revenue  Sources  Book, with  some  additions.   He                                                               
observed  that  there  has  been   much  discussion  centered  on                                                               
different methods of taxes, and  on DOR's regulations and audits;                                                               
however,  the bill  basically makes  one  calculation change  for                                                               
existing fields and  two calculation changes for new  fields.  He                                                               
warned  against   "throwing  out   ACES,  starting   over,  [and]                                                               
recreating  the wheel."   The  state is  often unfairly  taken to                                                               
task  for personnel  shortages that  cause the  division to  fall                                                               
behind the  pace set by industry.   But now, since  the state has                                                               
been under  one tax  structure for five  years, the  division can                                                               
keep up  with industry, therefore,  it is very important  to work                                                               
within  the existing  system.   Mr. Tangeman  said the  state tax                                                               
division understands  the current  tax system  as well  or better                                                               
than  private  industry,  and  is   now  on  equal  footing  with                                                               
industry.                                                                                                                       
                                                                                                                                
MR. TANGEMAN returned to  slide 5 and said cells D  and E are the                                                               
ACES and HB  3001 structures, which show how  they calculate down                                                               
through  the  income  statement.   The  only  change  under  this                                                               
legislation for existing production is  found on cell E, line 24.                                                               
Everything up  to that point  and calculating the gross  point of                                                               
production and  the production tax  value (PTV) remains  the same                                                               
as under  ACES.  Under HB  3001, the calculation of  the base tax                                                               
is taken  from cells D  and E, line  20, and then  the production                                                               
tax percentage  is calculated off of  that.  The change  is shown                                                               
in cell E, line  24 which is a 40 percent  reduction to the gross                                                               
value at the point  of production shown in cell E,  line 12.  So,                                                               
the state  is taking  40 percent  of approximately  $17.4 billion                                                               
and that amount  is a reduction in  cell E, line 24  and which is                                                               
then subtracted  from the PTV in  cell E, line 20  resulting in a                                                               
new adjusted production tax value shown  in cell E, line 25.  Mr.                                                               
Tangeman pointed  out that the  progressive tax rate  was already                                                               
calculated on the  full PTV, so the 16.7  percent progressive tax                                                               
rate is  applied to the new  adjusted production tax value.   The                                                               
result is  shown in  the difference between  the amount  shown in                                                               
cell D,  line 26,  of approximately  $2 billion  calculated under                                                               
ACES, and the  amount shown in cell E, line  26, of approximately                                                               
$900 million  calculated under HB 3001.   Cells D and  E, line 27                                                               
add the  base tax and the  progressive tax rate:   the difference                                                               
between  the total  taxes before  credits  is approximately  $1.1                                                               
billion;  the  difference  after credits  is  approximately  $1.4                                                               
billion.                                                                                                                        
                                                                                                                                
1:33:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   KAWASAKI  asked   whether   the  Gross   Revenue                                                               
Exclusion in cell  E, line 24 is comparable to  a standard income                                                               
tax deduction.                                                                                                                  
                                                                                                                                
MR. TANGEMAN described the difference as a tax reduction.                                                                       
                                                                                                                                
REPRESENTATIVE KAWASAKI  asked for the  origin of the  40 percent                                                               
reduction and  how that  reduction will  lead to  more production                                                               
and jobs.                                                                                                                       
                                                                                                                                
COMMISSIONER  BUTCHER  explained  DOR worked  with  the  governor                                                               
looking at different  tax rate models - with  absolute profit and                                                               
with percentages  of profit -  to determine what would  be viewed                                                               
by the industry as material and  similar to HB 110.  The decision                                                               
was made  at 40  percent in  the belief  that companies  will see                                                               
this as a material change, and  that will lead to more investment                                                               
and production.                                                                                                                 
                                                                                                                                
REPRESENTATIVE KAWASAKI  asked whether the department  found that                                                               
a savings of $1.5 billion  was meaningful, and then deducted that                                                               
amount from the Gross Revenue Exclusion.                                                                                        
                                                                                                                                
COMMISSIONER BUTCHER  said the  decision was  made by  looking at                                                               
the  percentages through  the effective  tax curve,  the absolute                                                               
profit, and the percentages of profit.   The reduction in HB 3001                                                               
is less than that proposed by  HB 110, but is not radically less.                                                               
He  cautioned  that  a  tax  savings  radically  less  would  not                                                               
increase the  likelihood that companies  would change  their view                                                               
of Alaska in terms of investment.   In fact, there is no "perfect                                                               
percent," but  this is a general  area to work from  that will be                                                               
viewed  as meaningful.   In  further  response to  Representative                                                               
Kawasaki, he  said the  term material or  meaningful refers  to a                                                               
tax reduction that  reflects looking at the tax  rate, the dollar                                                               
amount,  the percentage  change  between the  government and  the                                                               
companies, and other things.                                                                                                    
                                                                                                                                
1:37:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER  returned attention to slide  5, and asked                                                               
Mr. Tangeman  to review the  calculations found in cell  E, lines                                                               
12-16.                                                                                                                          
                                                                                                                                
MR. TANGEMAN  responded that 40  percent of $17.4 billion  is the                                                               
exclusion amount which is deducted  from the PTV of $12.4 billion                                                               
shown in cell E, line 20.                                                                                                       
                                                                                                                                
COMMISSIONER  BUTCHER pointed  out 100  percent of  production is                                                               
taxed at  the 25 percent base  rate; 60 percent of  the reduction                                                               
is  taxed at  the progressivity  level;  and 40  percent is  held                                                               
harmless from the progressivity level.                                                                                          
                                                                                                                                
REPRESENTATIVE  GARDNER  recalled  the  Senate  suggested  -  for                                                               
simplicity - that  progressivity could be kept the  same, and the                                                               
state could  take out  40 percent  of the  profits with  the same                                                               
result.  She inferred DOR's method  adds a layer of complexity to                                                               
the  tax  system   for  the  legislature  and   the  industry  to                                                               
understand.                                                                                                                     
                                                                                                                                
CO-CHAIR FEIGE noted the state could get rid of progressivity.                                                                  
                                                                                                                                
COMMISSIONER  BUTCHER agreed  that the  change could  be made  in                                                               
different ways, but this method is "a fairly minor tweak to us."                                                                
                                                                                                                                
MR. TANGEMAN  commented that  the bulk  of the  complexity within                                                               
the ACES  structure is taking place  "above the PTV value."   The                                                               
change being discussed is below the  PTV calculation and is a tax                                                               
capitalization  change  that has  "minimal  to  no effect  on  us                                                               
internally -  and the private  sector -  in trying to  figure out                                                               
the differences here ...."                                                                                                      
                                                                                                                                
CO-CHAIR   SEATON   asked    whether   the   Deductible   Capital                                                               
Expenditures found  in cells D and  E, line 16 are  the aggregate                                                               
deductible expenditures estimated across  the North Slope and all                                                               
existing fields for 2013.                                                                                                       
                                                                                                                                
MR. TANGEMAN said  that estimate comes from the  Fiscal Year 2013                                                               
(FY  13) Production  Tax Estimate  found in  the Revenue  Sources                                                               
Book,  page   104.    These   are  allowable   lease  expenditure                                                               
deductions;  however, other  expenditures that  companies make  -                                                               
that are not deductible - are not reflected in this estimate.                                                                   
                                                                                                                                
CO-CHAIR SEATON  requested that DOR  provide models  on companies                                                               
that are investing and those that are not investing.                                                                            
                                                                                                                                
COMMISSIONER  BUTCHER  agreed.   He  further  explained that  the                                                               
Senate  bill  was  amended  to   attach  progressivity  to  gross                                                               
profits.  This meant that a  company working on a high-cost field                                                               
trying  to develop  viscous or  heavy oil  was penalized  because                                                               
progressivity  followed gross;  however,  a  company "in  harvest                                                               
mode," saw benefits.   This provision was seen as  a tax increase                                                               
by industry,  and HB  3001 seeks to  not penalize  companies that                                                               
have higher costs.                                                                                                              
                                                                                                                                
1:44:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE clarified  that HB 3001 is configured  so that the                                                               
more expensive  it is  to run  a field,  and the  more investment                                                               
that is made,  the lower the percentage of total  revenue is paid                                                               
in taxes.  This is the advantage of making investments.                                                                         
                                                                                                                                
COMMISSIONER BUTCHER said  correct.  Currently ACES  is "all net"                                                               
rather than having the progressivity  piece being strictly gross,                                                               
and not having companies able to deduct their expenses.                                                                         
                                                                                                                                
CO-CHAIR SEATON reminded the committee  it has not analyzed gross                                                               
progressivity.  He said he  was interested in the incentives that                                                               
are built  into the structure of  HB 3001 for companies  that are                                                               
in harvest mode,  that are in expansion mode,  that are investing                                                               
overseas, and that  are investing in Alaska.   Merely reducing 40                                                               
percent   of  gross   from  progressivity   does  not   make  any                                                               
discrimination   between  companies   engaged   in  the   various                                                               
aforementioned  pursuits,  and he  urged  DOR  to show  what  the                                                               
governor   and  the   administration  believe   will  incentivize                                                               
companies to  invest in Alaska.   Specifically, how HB  3001 will                                                               
incentivize investment in Alaska instead of Russia.                                                                             
                                                                                                                                
COMMISSIONER  BUTCHER acknowledged  the information  presented so                                                               
far was more applicable to a previous meeting.                                                                                  
                                                                                                                                
REPRESENTATIVE  HERRON  asked  whether  Gross  Revenue  Exclusion                                                               
could be called adjusted gross revenue.                                                                                         
                                                                                                                                
COMMISSIONER BUTCHER  indicated yes.   He explained DOR  took the                                                               
same  language used  by the  Senate Finance  Committee.   Slide 6                                                               
entitled, "Effective  production tax  rates" was a  graph showing                                                               
the  tax  rate  for  ACES  is  substantially  higher  than  those                                                               
proposed  by  HB  110  and  HB  3001.    House  Bill  3001  is  a                                                               
substantial  reduction from  current  law, and  a small  increase                                                               
from HB 110.   The differences between the rates  paid for HB 110                                                               
and  the current  bill  occur mostly  when the  price  of oil  is                                                               
between $90  and $160 per barrel.   At low prices,  and extremely                                                               
high prices, the  difference is slight.  He said  he believed the                                                               
companies  will  see  the  reduction  of  taxes  in  HB  3001  as                                                               
meaningful  because  the increase  from  proposed  HB 110  is  "a                                                               
couple hundred million dollars."                                                                                                
                                                                                                                                
1:49:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER surmised  that  the  production tax  rate                                                               
shown for ACES  on slide 6 assumes companies did  not reinvest at                                                               
all to bring down the progressivity rate and lower their taxes.                                                                 
                                                                                                                                
COMMISSIONER BUTCHER explained that  the chart indicates what tax                                                               
rates  a company  would  pay, although  if there  were  a lot  of                                                               
investment a company  would benefit some from  that.  Ultimately,                                                               
the  exceedingly high  ACES tax  rate  itself is  a deterrent  to                                                               
investment  in Alaska.   Slide  7 entitled,  "Marginal Government                                                               
Take" illustrated  a frequent complaint  from oil  companies that                                                               
during periods of high prices, ACES  takes their profit away.  At                                                               
high oil prices  80 percent to 90 percent of  each dollar goes to                                                               
government  due  to  progressivity.    Moreover,  unlike  federal                                                               
income tax  rates, where everyone  pays a  lower rate at  a lower                                                               
bracket of income,  in Alaska the higher tax rate  is paid on the                                                               
entire barrel  of oil,  placing the government  take at  close to                                                               
100 percent.   On  slide 7, the  ACES tax rate  rises to  over 90                                                               
percent when oil is approximately $130  per barrel.  The red line                                                               
represented HB  110, and indicated  how tax increases  stepped up                                                               
in  each  bracket,  and  the   blue  line  represented  HB  3001,                                                               
indicating tax  increases in the  same manner  as ACES, but  at a                                                               
lower rate.                                                                                                                     
                                                                                                                                
CO-CHAIR SEATON  pointed out  high marginal  tax rates  mean that                                                               
reinvestment  by industry  lowers  the production  tax value  and                                                               
dramatically  lowers taxes.   He  posited HB  3001 is  created to                                                               
lower  the marginal  tax advantage  from reinvestment  in Alaska,                                                               
and inquired what is being  substituted for this tax advantage to                                                               
encourage reinvestment in Alaska versus somewhere else.                                                                         
                                                                                                                                
1:54:44 PM                                                                                                                    
                                                                                                                                
MR.   TANGEMAN  said   the   incentive   through  the   operating                                                               
deductibility  and the  capital  deductibility  has not  changed.                                                               
The method  to calculate PTV  remains identical to that  of ACES,                                                               
thus a  company that  reinvests will  realize the  same benefits.                                                               
The  only  change is  the  amount  of  tax  a company  will  pay;                                                               
therefore, the  amount of  tax paid  on the  ultimate net  PTV is                                                               
going down.                                                                                                                     
                                                                                                                                
CO-CHAIR SEATON  acknowledged the  tax credits incentive  has not                                                               
changed; however,  the incentive of  taxing a barrel as  one unit                                                               
means  that as  a  company reinvests  in  Alaska it  dramatically                                                               
lowers  its  production  tax  value  on all  of  its  oil.    The                                                               
calculation in HB  3001 eliminates 40 percent of  the gross value                                                               
of production,  thus the amount  of tax incentive to  reinvest is                                                               
lowered by  40 percent.   He surmised another tax  incentive must                                                               
have been substituted in the bill.                                                                                              
                                                                                                                                
COMMISSIONER  BUTCHER said  no.   The  bill  keeps an  aggressive                                                               
marginal take  from 70 percent  to 80  percent.    Companies have                                                               
not spoken in  favor of high progressivity; in fact,  in the five                                                               
years  after the  passage  of ACES,  Alaska  has not  experienced                                                               
capital reinvestment  at the rate  that is taking place  in North                                                               
Dakota, Texas, and  Alberta, Canada.   He  questioned whether the                                                               
intent of ACES  was to encourage reinvestment in  this manner and                                                               
opined oil companies would say it does not.                                                                                     
                                                                                                                                
REPRESENTATIVE SADDLER  returned attention  to slide 7  and asked                                                               
for the meaning of the percentages on the "y" axis of the graph.                                                                
                                                                                                                                
COMMISSIONER BUTCHER  said the percentages are  of the additional                                                               
dollar take.   For example, 90 percent at $130  per barrel (/bbl)                                                               
of  oil means  that "90  cents  of that  dollar would  go to  the                                                               
government."   In further response to  Representative Saddler, he                                                               
said the  drop in the  percentage at  $130/bbl is because  at oil                                                               
prices lower  than $130/bbl the  tax increase is point  four, but                                                               
at $130/bbl  the amount of  the tax  increase drops to  a gradual                                                               
point one, resulting in a lower marginal take per dollar.                                                                       
                                                                                                                                
1:58:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  questioned why  Alaska -  unlike other                                                               
jurisdictions - maintains a higher  tax rate on the entire barrel                                                               
of oil when prices are rising.                                                                                                  
                                                                                                                                
COMMISSIONER BUTCHER  reminded the committee that  the governor's                                                               
"bill  with brackets"  was  not  supported by  the  Senate.   The                                                               
governor's intent for HB 3001  was to use the structure supported                                                               
by  the Senate  for new  fields, and  to apply  that to  existing                                                               
fields, as long  as the blended legislation  resulted in material                                                               
change.    In  further  response to  Representative  P.  Wilson's                                                               
comment  on  whether HB  3001  is  passable,  he noted  that  the                                                               
effective tax  rate is at a  point where industry is  expected to                                                               
testify;  as a  matter  of fact,  AOGA sees  this  as a  material                                                               
change.  Slide 8 entitled,  "Absolute Profit - ACES" indicated at                                                               
oil prices  of approximately $120/bbl,  total government  take is                                                               
about $12.3  billion and company take  is $4.9 billion.   Slide 9                                                               
entitled,  "Absolute Profit  - CSHB  110(FIN)" indicated  that at                                                               
oil  prices  of  approximately $120/bbl,  total  government  take                                                               
would  be  about $11  billion  and  company  take would  be  $6.3                                                               
billion.    Slide  10  entitled,  "Absolute  Profit  -  HB  3001"                                                               
indicated  that at  oil prices  of approximately  $120/bbl, total                                                               
government take would be $11.2  billion and company take would be                                                               
$6 billion.   He  concluded that  under these  circumstances ACES                                                               
garners  the state  $9.6  billion  and HB  3001  would garner  $8                                                               
billion, which is  still a substantial amount of  money and would                                                               
also increase investment and ultimate production.                                                                               
                                                                                                                                
COMMISSIONER  BUTCHER  presented  slide 11  entitled,  "Share  of                                                               
Profit -  ACES" which indicated  at $120/bbl the profit  to state                                                               
and federal government  currently is 7l percent  and to companies                                                               
is  29 percent.    Slide 12  entitled, "Share  of  Profit -  CSHB                                                               
110(FIN)"  indicated that  at $120/bbl  the profit  to government                                                               
would be 64 percent and to  companies would be 36 percent.  Slide                                                               
13  entitled, "Share  of  Profit  - HB  3001"  indicated that  at                                                               
$120/bbl  the profit  to the  state would  be 46  percent and  to                                                               
companies  would be  35 percent.    This would  be a  substantial                                                               
reduction from ACES  and a small increase from HB  110, and would                                                               
be  viewed  as  meaningful  by companies.    Slide  14  entitled,                                                               
"Effective  production  tax rates  -  new  fields" indicated  the                                                               
rates on new fields for ACES, HB  110, and HB 3001.  The rate for                                                               
HB 3001  is a  lesser reduction  than for  HB 110,  was initially                                                               
suggested by the Senate, and gives  no tax breaks for new fields.                                                               
Commissioner Butcher opined this  rate will be substantive enough                                                               
to gain meaningful investment.                                                                                                  
                                                                                                                                
2:05:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  asked for  information on  the effects  of post-                                                               
tax, post-credits,  and well lease  expenditure credits  that are                                                               
applied to profits by HB 3001.                                                                                                  
                                                                                                                                
MR. TANGEMAN  said the  40 percent well  lease credit  would take                                                               
the HB 110 line from "20 to 40."                                                                                                
                                                                                                                                
CO-CHAIR  SEATON asked  whether  the difference  between the  red                                                               
line [HB 110] and the blue line  [HB 3001] was made by 20 percent                                                               
tax credits on well lease expenditures on the North Slope.                                                                      
                                                                                                                                
2:07:17 PM                                                                                                                    
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
2:08:20 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER clarified  that both the red  and blue lines                                                               
include the  well lease credits;  if the 40 percent  credits were                                                               
taken out  of the bill and  the current 20 percent  remain, there                                                               
would  be "a  little bit  less of  a tax  reduction, compared  to                                                               
current  law."   He offered  to  provide an  additional graph  to                                                               
reflect this scenario.                                                                                                          
                                                                                                                                
REPRESENTATIVE  MUNOZ  understood  from the  administration  that                                                               
approximately $14 billion in reinvestment  may happen if there is                                                               
meaningful tax reform.  She  inquired as to how much reinvestment                                                               
is expected specifically for legacy fields.                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER  related the  governor estimated  $5 billion                                                               
of investment  from companies working  in existing fields  and $9                                                               
billion   from   new   fields,  although   more   investment   is                                                               
anticipated.  Slide 15 entitled,  "Marginal Government Take - new                                                               
fields"  indicated  "where  the   percentage  would  be  of  each                                                               
additional  dollar increase  in the  price of  oil."   Similar to                                                               
that  of the  existing fields,  the  blue line  [HB 3001]  showed                                                               
there would  be lower  marginal take for  the government  than is                                                               
provided by ACES,  and tracked a little higher than  the red line                                                               
[HB  110], because  there are  no brackets.   Slide  16 entitled,                                                               
"Share of  Profit - ACES new  fields" indicated at oil  prices of                                                               
$120/bbl the  prospective percentage  of profit to  government is                                                               
71 percent  and to companies is  29 percent.  Slide  17 entitled,                                                               
"Share  of  Profit  -  CSHB 110(FIN)  new  fields"  indicated  at                                                               
$120/bbl  the  prospective  percentage of  profit  to  government                                                               
would be 59 percent and to  companies would be 41 percent.  Slide                                                               
18 entitled, "Share of Profit -  HB 3001 new fields" indicated at                                                               
$120/bbl  the  prospective  percentage of  profit  to  government                                                               
would be  61 percent and  to companies would  be 39 percent.   He                                                               
pointed  out the  substantial benefit  to companies  that do  the                                                               
exploration,  investment,   and  development  in   expensive  new                                                               
fields.                                                                                                                         
                                                                                                                                
2:12:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER  asked for a  projection on the cost  of a                                                               
barrel of oil over the next five to ten years.                                                                                  
                                                                                                                                
COMMISSIONER BUTCHER stated DOR expects  the price of oil to stay                                                               
around the  $110/bbl range.   Other  projections range  from $70-                                                               
$170/bbl.  He  noted that at the time ACES  was under discussion,                                                               
oil  prices were  around $50-$60/bbl,  thus consideration  of its                                                               
outcomes at higher prices were not fully explored.                                                                              
                                                                                                                                
MR. TANGEMAN added  that the absolute profit slides  are based on                                                               
consistent prices for one entire year.                                                                                          
                                                                                                                                
CO-CHAIR SEATON  disagreed with Commissioner Butcher  and related                                                               
that the  discussion of  ACES did cover  high marginal  tax rates                                                               
with data  provided by oil  and gas  consultants.  He  then asked                                                               
whether the  small producer tax  credit is incorporated  in DOR's                                                               
overview  figures.   This  is important  because  he assumed  the                                                               
prospective percentages  on new fields are  focused on non-legacy                                                               
producers.                                                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER said no.                                                                                                   
                                                                                                                                
CO-CHAIR SEATON stressed that ACES  incorporates a small producer                                                               
tax credit  specifically tasked to  change some of  the economics                                                               
for  small fields  and  new producers.   If  this  aspect is  not                                                               
included  in  the  present  analysis, the  picture  will  not  be                                                               
complete; he urged for this  subject to be included in subsequent                                                               
field-by-field analyses.                                                                                                        
                                                                                                                                
REPRESENTATIVE   PETERSEN  returned   to  the   subject  of   new                                                               
investment  and asked  for the  period of  time during  which the                                                               
expected investment would take place.                                                                                           
                                                                                                                                
COMMISSIONER BUTCHER estimated three to ten years.                                                                              
                                                                                                                                
2:16:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PETERSEN called  attention  to slide  5, cell  E,                                                               
line 32 and  observed that the total tax  after credits reduction                                                               
of  $1.46  billion,  when  multiplied by  10  years,  equals  the                                                               
expected investment amount of $14 billion.                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER said this is a coincidence.                                                                                
                                                                                                                                
MR. TANGEMAN,  also referring  to slide 5,  pointed out  that DOR                                                               
estimated 47  percent of the  total oil production 10  years from                                                               
now  must come  from new  sources.   The proposed  legislation is                                                               
intended to ensure  that significant investment is  made, and new                                                               
sources are realized.                                                                                                           
                                                                                                                                
CO-CHAIR SEATON  returned attention  to slide  18, and  asked how                                                               
much of the state take is projected from production tax.                                                                        
                                                                                                                                
COMMISSIONER BUTCHER said DOR would provide a breakdown.                                                                        
                                                                                                                                
2:20:33 PM                                                                                                                    
                                                                                                                                
MR.  TANGEMAN, also  in response  to Co-Chair  Seaton's question,                                                               
said he did not want to speculate at this time.                                                                                 
                                                                                                                                
2:20:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON reminded the committee  he has requested modeling                                                               
of HB  3001 based  on the  4/11 analysis of  a "Great  Bear type"                                                               
production field that showed at  $100/bbl through 2028, the state                                                               
would have a  negative loss of production tax of  $2 billion.  He                                                               
remarked:                                                                                                                       
                                                                                                                                
     And if we  averaged, I think it was,  on that analysis,                                                                    
     $80  a  barrel, we  have  a  negative $7  billion  from                                                                    
     production tax.  And so I'm  trying to figure out how -                                                                    
     if  we're   looking  at  a   negative  $2   billion  in                                                                    
     production  tax  loss  over   the  first  15  years  of                                                                    
     operation of  that style  of a field,  how we  can have                                                                    
     that  not calculated  into  this, as  far  as share  of                                                                    
     revenue.  And so, I'd  appreciate that, and I know that                                                                    
     the  Great  Bear  ...  people are  trying  to  say  ...                                                                    
     they're not  capable of drilling  200 wells a  year, or                                                                    
     something,  but  ...  we  have  a  commercial  proposal                                                                    
     before  us,  that  was  presented  to  the  House,  had                                                                    
     numbers ... of wells,  had production amounts per year,                                                                    
     and so  I don't want to  go in and say  that that's not                                                                    
     doable by  someone else, especially when  we have 6,000                                                                    
     wells a  year being  drilled in other  shale operations                                                                    
     in  other places,  and we're  trying  to somehow  mimic                                                                    
     that .... If  you would get back to us  on the analysis                                                                    
     of  that  same  thing  that   we  did  just  before  we                                                                    
     adjourned last  year ...  and then  roll that  into how                                                                    
     this works,  if these  new fields  are similar  and are                                                                    
     composed of shale oil.                                                                                                     
                                                                                                                                
COMMISSIONER  BUTCHER  said DOR  will  address  this issue.    He                                                               
advised that  shale oil  is not  what the  department is  used to                                                               
dealing  with   in  terms  of   using  capital  credits   to  get                                                               
conventional  oil.    The  development of  shale  oil  is  almost                                                               
continual capital spending  - drilling well after  well - because                                                               
90  percent of  the oil  comes  from the  well in  the first  two                                                               
years.     Production is  also  radically different  in terms  of                                                               
taxation  and development;  for example,  by the  installation of                                                               
permanent  roads, the  use of  many vehicles,  and the  number of                                                               
wells drilled.   This would be  a huge change in  oil development                                                               
in Alaska, affecting taxes and  permitting.  Commissioner Butcher                                                               
cautioned  that   fitting  in   shale  oil  is   very  difficult.                                                               
Furthermore, the  DNR says shale  oil development is not  as near                                                               
as previously thought.                                                                                                          
                                                                                                                                
CO-CHAIR SEATON  observed that  the shale  oil proposal  has been                                                               
underway for one year and millions  of dollars have been spent on                                                               
leases and  investigations in the  Brooks Range.  He  warned that                                                               
DOR  may not  notice, but  changes in  tax structure  will impact                                                               
shale oil  development; in fact, projections  of negative revenue                                                               
should be considered when  designing structures and incentivizing                                                               
new fields.                                                                                                                     
                                                                                                                                
2:25:46 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER  assured the committee  DOR and DNR  do take                                                               
the  potential   for  shale  oil  seriously.   Returning  to  the                                                               
presentation, slide 19 entitled, "HB 3001 Summary" read:                                                                        
                                                                                                                                
    · Provisions in HB 3001/SB 3001 represent "meaningful change"                                                               
    · Meaningful change is needed to incentivize development of                                                                 
      Alaska's oil resources                                                                                                    
    · Meaningful change is needed to stimulate jobs and economic                                                                
      activity for Alaska's economy                                                                                             
    · Producers  have   committed    to   additional   investment                                                               
      contingent on meaningful change                                                                                           
                                                                                                                                
COMMISSIONER BUTCHER  expressed the administration's  belief that                                                               
production must  come from  known existing  fields in  the short-                                                               
term  to stem  the  decline  of production,  hence  its focus  on                                                               
legacy fields.                                                                                                                  
                                                                                                                                
2:27:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   HERRON  observed   that   critics  believe   the                                                               
administration  has a  blind  allegiance to  oil  producers.   He                                                               
asked  the  commissioner  whether  DOR could  provide  a  written                                                               
commitment from the  producers to the governor  saying that there                                                               
will be investment contingent on meaningful change.                                                                             
                                                                                                                                
COMMISSIONER  BUTCHER  said he  would  provide  to the  committee                                                               
"whatever the governor has on, on that."                                                                                        
                                                                                                                                
REPRESENTATIVE LYNN referred  to the final bullet  point on slide                                                               
19 which read:                                                                                                                  
                                                                                                                                
       Producers have committed to additional investment                                                                        
     contingent on meaningful change                                                                                            
                                                                                                                                
REPRESENTATIVE LYNN  asked for clarification  on the form  of the                                                               
commitment, the meaning of "additional  investment," and who will                                                               
decide whether there has been "meaningful change."                                                                              
                                                                                                                                
COMMISSIONER BUTCHER responded:                                                                                                 
                                                                                                                                
     The governor and  I have both said the  same thing from                                                                    
     the very  beginning which  is: We can  lay out  what we                                                                    
     see is  the problem.  We  can lay out what  we think is                                                                    
     the  solution, but  ultimately companies  are going  to                                                                    
     have to come  forward and convince you  ... how they're                                                                    
     going to look at Alaska  differently, that's a very big                                                                    
     piece of this,  government can't ... wrap it  all up in                                                                    
     a nice neat bow and  tell you that, you ultimately have                                                                    
     to  hear  from the  industry:    number one,  that  its                                                                    
     material and number two, what  that means and what that                                                                    
     means for Alaska.                                                                                                          
                                                                                                                                
CO-CHAIR  SEATON recalled  that  several years  ago BP  testified                                                               
that  it  is   not  interested  in  the   rapid  acceleration  of                                                               
production because as the technology  improves for the production                                                               
of heavy oil, light  oil will be needed as a  diluent to ship the                                                               
heavy oil  through TAPS.   He asked  whether the industry  is now                                                               
willing to rapidly accelerate production  and strip the light oil                                                               
from the Prudhoe Bay area.                                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER  said no, BP  is still working  to determine                                                               
what percentage  of light and  heavy oil  is needed to  flow down                                                               
the pipeline.   In addition,  during the  drafting of HB  110, BP                                                               
indicated it is  not at the point of  determining what incentives                                                               
are desired  for the production of  heavy oil.  The  state's role                                                               
in tapping the  tens of billions of barrels of  heavy and viscous                                                               
oil in the  Prudhoe Bay/Kuparuk area is to continue  to work with                                                               
industry.                                                                                                                       
                                                                                                                                
2:32:58 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON stated  his willingness to work  with everyone on                                                               
the North  Slope to incentivize  technology; in fact,  not having                                                               
ring-fencing  and  allowing companies  to  write  off high  costs                                                               
against  the existing  production tax  is  the best  way for  the                                                               
state to  do that.   However, he  questioned why the  state would                                                               
change  the  taxes,  thereby  saving  the  industry  billions  of                                                               
dollars  as an  incentive for  accelerating infield  drilling and                                                               
stripping the oil out now, in  spite of knowing that at least one                                                               
of the  big three oil companies  has no intention of  doing that.                                                               
BP will  take the  tax savings, but  has other  strategic reasons                                                               
for not  accomplishing the goal.   Co-Chair Seaton asked  for the                                                               
purpose of pursuing  a tax-based incentive in light  of BP's lack                                                               
of interest in increasing production by stripping light oil out.                                                                
                                                                                                                                
COMMISSIONER BUTCHER answered that  there are billions of barrels                                                               
of oil on  the slope, "and in conversations I've  had with DNR or                                                               
anybody else, I've never heard  it couched that potentially there                                                               
wouldn't be the  light oil available on the  slope, in particular                                                               
if we get more investment and,  and more development."  He opined                                                               
whether BP holds back on light oil is not one of the big issues.                                                                
                                                                                                                                
MR.  TANGEMAN   pointed  out  the   goal  to  make   Alaska  more                                                               
competitive is  to draw investment dollars,  and those investment                                                               
dollars will be  used by companies in different manners.   BP has                                                               
a huge resource  of heavy oil, thus its  investment will probably                                                               
be used  for heavy oil.   Although shale  oil has become  a topic                                                               
for discussion, shale oil is  just now economic because the price                                                               
of  oil  has risen  above  $60-$70/bbl.    In North  Dakota,  new                                                               
technology and high  oil prices combined to  make the development                                                               
of the  known reserves  in the Bakken  shale oil  field economic.                                                               
The  development  of heavy  and  viscous  oil requires  the  same                                                               
combination  of   technology,  investment,  and   sustained  high                                                               
prices.                                                                                                                         
                                                                                                                                
CO-CHAIR  SEATON concluded  the  state is  not  listening to  the                                                               
companies  that  are saying  the  light  oil  will be  needed  as                                                               
technology advances, that  it intends to change the  tax rates to                                                               
try to  force the companies to  invest in the depletion  of light                                                               
oil, and  that it is  waiting for  technology that is  unknown at                                                               
this time.   He questioned  whether the state  should incentivize                                                               
now, when there  is testimony from industry that the  time is not                                                               
right to  rapidly accelerate  and deplete  more easily-accessible                                                               
light oil.   Co-Chair Seaton  cautioned that all  three companies                                                               
have to agree on accelerating production in legacy fields.                                                                      
                                                                                                                                
2:38:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  advised the Bakken shale  field in North                                                               
Dakota became economic not due to  changes in the tax system, but                                                               
because  of high  prices and  a technological  advance: hydraulic                                                               
fracturing became  commonplace.  He encouraged  more testimony on                                                               
the goals  and provisions of  HB 3001,  and asked for  the actual                                                               
meaning  of "meaningful"  beyond  the  dictionary definitions  of                                                               
"significant"  and "purposeful."   Representative  Kawasaki heard                                                               
that  meaningful change  means "significant  dollars back  to the                                                               
oil  industry," but  targeting an  oil tax  regime to  change the                                                               
behavior  of  companies and  which  results  in more  production,                                                               
development, and  local hire,  would be meaningful  to him  - and                                                               
that is what  the administration should demand  from the lessees.                                                               
He remarked:                                                                                                                    
                                                                                                                                
     I want to  know exactly what the governor  means by the                                                                    
     word meaningful ... I want  to know exactly how each of                                                                    
     those  specific bullets  and ...  each of  the specific                                                                    
     bullets  points   on  [slide]   2,  dealing   with  key                                                                    
     provisions, are going  to get us to  more oil, producer                                                                    
     commitments, more  development on  the North  Slope and                                                                    
     the rest  of the  state, more local  hire ...  I didn't                                                                    
     see it with HB 110 ...."                                                                                                   
                                                                                                                                
2:41:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER  heard there  should be a  linkage between                                                               
the modification  of oil taxes  and a firm commitment  to produce                                                               
more  oil.   He  asked  whether  mechanisms  exist to  make  this                                                               
linkage.                                                                                                                        
                                                                                                                                
COMMISSIONER  BUTCHER relayed  it is  unconstitutional to  attach                                                               
quid  pro quo  to state  tax policy.   Furthermore,  industry may                                                               
intend  to meet  a certain  commitment, but  changes in  economic                                                               
circumstances, such as  a drop in oil prices or  losses due to an                                                               
oil spill, may intervene.  He  opined these are reasons that make                                                               
it hard  for companies to  come forward; however, he  does expect                                                               
industry would  provide details  on the  potential of  the legacy                                                               
fields and "convince you that this  is going to lead to something                                                               
material."                                                                                                                      
                                                                                                                                
MR. TANGEMAN  added that DOR is  not looking in a  vacuum just at                                                               
the effect on Alaska, but is  comparing Alaska to the rest of the                                                               
world.  In  Alberta, North Dakota, Texas,  and Russia, investment                                                               
is  taking  place  due  to   high  oil  prices.    He  encouraged                                                               
legislators to  study the economics,  but to keep  in perspective                                                               
that  Alaska is  not  seeing investment  sufficient  to turn  the                                                               
decline curve around.                                                                                                           
                                                                                                                                
REPRESENTATIVE  SADDLER  inquired  as   to  the  details  of  the                                                               
constitutional issue broached by Commissioner Butcher.                                                                          
                                                                                                                                
COMMISSIONER  BUTCHER said  he didn't  know, but  had discussions                                                               
with the Department of Law (DOL).                                                                                               
                                                                                                                                
REPRESENTATIVE   SADDLER    requested   a   response    for   his                                                               
constituents.                                                                                                                   
                                                                                                                                
CO-CHAIR  SEATON asked  whether Commissioner  Butcher believed  a                                                               
tax rate structured  on a production rate above  the decline rate                                                               
of the  field is illegal,  or unconstitutionally changes  the tax                                                               
rate.  He remarked:                                                                                                             
                                                                                                                                
     That's a  quid pro  quo -  you know -  you get  the tax                                                                    
     reduction if  you produce above the  decline curve, and                                                                    
     I just want  to clarify that that's not the  style of a                                                                    
     tax  quid  pro  quo  that you're  talking  about  being                                                                    
     illegal.                                                                                                                   
                                                                                                                                
2:46:48 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER  said  he  was talking  about  a  situation                                                               
"doing a  company-specific 'We'll  do this to  your taxes  if you                                                               
this.'"                                                                                                                         
                                                                                                                                
CO-CHAIR FEIGE  observed decoupling becomes  more of an  issue if                                                               
there is a  large sale of gas.  He  asked whether the legislature                                                               
should consider decoupling at this time.                                                                                        
                                                                                                                                
COMMISSIONER  BUTCHER advised  the  administration  does not  see                                                               
decoupling  as a  serious  issue  at this  point.    If the  2013                                                               
legislative session  becomes the  "gas fiscal session,"  both the                                                               
companies and  the state acknowledge  that changes  are necessary                                                               
to  progress  the large  gas  pipeline;  however, the  decoupling                                                               
issue was not a priority for this legislation.                                                                                  
                                                                                                                                
MR. TANGEMAN pointed to the  benefit of making changes by working                                                               
within an existing  tax structure that is understood.   There are                                                               
different ways to  change the existing tax  structure, but moving                                                               
to gas  will have  an effect  on all of  the resources.   Today's                                                               
changes do not require starting over.                                                                                           
                                                                                                                                
REPRESENTATIVE DICK  suggested two ways to  incentivize and raise                                                               
production:   drill more holes  into the existing,  finite amount                                                               
of oil,  which would hasten the  end of the resource;  or enhance                                                               
technological  development.   The  technology does  not exist  to                                                               
address heavy  oil, although the  state could invest  in research                                                               
in heavy  and tidal oil,  and he urged  for a focus  on research.                                                               
He then asked about the  possibility of being patient and waiting                                                               
for oil  migration within  a field  to drain all  of the  oil out                                                               
through the wells that are already there.                                                                                       
                                                                                                                                
COMMISSIONER BUTCHER  expressed the administration's  belief that                                                               
Alaska is not  running out of oil;  in fact, DOR and  DNR will be                                                               
presenting  details on  production from  the North  Slope.   When                                                               
production began  in Prudhoe Bay,  there was very  high pressure;                                                               
90 percent of  the flow was oil,  and less than 10  percent was a                                                               
combination  of water  and natural  gas.   Now the  companies are                                                               
cycling eight billion  cubic feet of gas to keep  up the pressure                                                               
and the  flow is 90 percent  water, gas, and sand  in many wells.                                                               
Today it  is much more expensive  to produce a barrel  of oil out                                                               
of Prudhoe Bay.                                                                                                                 
                                                                                                                                
MR.  TANGEMAN added  that  the Alaska  Oil  and Gas  Conservation                                                               
Commission (AOGCC)  has a  significant role  in that  it monitors                                                               
the best way  to extract the most oil from  a field; for example,                                                               
limiting  the initial  flow  to ensure  oil is  not  left in  the                                                               
ground.     In  addition,  the  U.S.   Geological  Survey  (USGS)                                                               
determined the  North Slope  is 70  percent unexplored;  in fact,                                                               
there is  agreement that there remains  a significant hydrocarbon                                                               
base on the North  Slope - in addition to Prudhoe  Bay - that can                                                               
be realized with new research, development, and investment.                                                                     
                                                                                                                                
REPRESENTATIVE  SADDLER  asked  whether there  are  fallacies  or                                                               
false arguments that the legislators  should guard against during                                                               
the subsequent testimony.                                                                                                       
                                                                                                                                
2:53:53 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER said  it is easy to "get bogged  down into a                                                               
lot of complexity."  Tax  rates, cost, world economics, and other                                                               
issues play a  part in economics, but it is  possible to focus on                                                               
specifics,  such as  the extremely  high cost  of development  in                                                               
Alaska,  which foils  comparisons with  the  Lower 48.   He  also                                                               
recommended resisting simple answers to complex problems.                                                                       
                                                                                                                                
MR. TANGEMAN related the biggest fallacy  is:  How do we get back                                                               
to that number?   Instead, the question is:  Are  we at the right                                                               
number?  He explained that the  state assessed a gross tax system                                                               
[economic limit factor  (ELF)] for many years, then  changed to a                                                               
net  system [petroleum  profits tax  (PPT)], and  then after  one                                                               
year changed  to ACES.   Although the  state's experience  with a                                                               
net  tax system  was limited  to one  year, within  weeks of  its                                                               
introduction, ACES was enacted.   There was a billion plus dollar                                                               
difference  between  PPT and  ACES,  and  after experiencing  the                                                               
effects of  five years  under the ACES  tax system,  Mr. Tangeman                                                               
questioned whether ACES provides the  right number for the state,                                                               
and  suggested  seeking  a  return  to that  number  is  a  false                                                               
discussion.                                                                                                                     
                                                                                                                                
CO-CHAIR SEATON  returned attention  to the question  of activity                                                               
around the world that  is not seen in Alaska.   He has heard that                                                               
HB 3001 might create a stampede;  however, right now on the North                                                               
Slope:   there are more  new players  than the total  of existing                                                               
players; last year was the  most successful lease sale ever; more                                                               
companies are looking at  conventional and nonconventional plays;                                                               
employment  is   highest  of  all   time;  and  there   are  more                                                               
international  and small  companies participating.   Furthermore,                                                               
the state  is collecting  income from  lease sales  and interest.                                                               
There  are  11  new  companies,  and he  inquired  how  many  are                                                               
necessary to  be regarded as investment  on the North Slope.   He                                                               
related  that Brooks  Range Petroleum  is producing  from Mustang                                                               
10,000-13,000/bbls per day but may not  be able to access TAPS in                                                               
2013-2014 when  needed.   Brooks Range  Petroleum also  has plans                                                               
for constructing  processing facilities.   As  a matter  of fact,                                                               
facility  access is  a real  problem that  needs to  be addressed                                                               
now, and  he asked why is  there no interest from  state agencies                                                               
to assist  in oil production that  is two years closer  than that                                                               
from  Point  Thomson,  or in  shale  prospects.    Representative                                                               
Seaton  asked what  activities the  administration is  interested                                                               
in,  other than  a  high  rate of  investment  by  the big  three                                                               
producers.                                                                                                                      
                                                                                                                                
3:01:45 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER  recalled  employment peaked  right  before                                                               
ACES passed because  maintenance was needed on  the aging fields,                                                               
but over  the last four  or five years employment  has plateaued.                                                               
In other  places such  as Texas, employment  has exploded  due to                                                               
high oil prices.  Also, capital  investment in Alaska is high for                                                               
mature fields, but  has "dipped a little bit" and  is going crazy                                                               
in other places.   Triple-figure oil has  made prospects economic                                                               
that were  not before;  in fact,  Texas was  on the  same decline                                                               
curve as  Alaska, but has begun  to turn the decline  around, and                                                               
Alaska continues with a slow decline.                                                                                           
                                                                                                                                
MR. TANGEMAN explained  that ACES provides a  very generous suite                                                               
of tax  credits which draw  new companies  to the state,  but the                                                               
money to  fund the credits  comes from the  taxpayers, therefore,                                                               
when  they   become  producers  and  taxpayers,   there  is  less                                                               
enthusiasm.   Companies must  consider what  will happen  if they                                                               
become  producers,  and  what  the  opportunities  are  in  North                                                               
Dakota, Texas,  and Alberta.   Although explorers  are interested                                                               
"there's a definite disconnect between  that side of ACES and the                                                               
production tax side of ACES."                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER  asked  DOR  to  provide  information  on                                                               
whether the  new oil  production in Texas  is from  legacy fields                                                               
that are producing more, or from all new fields.                                                                                
                                                                                                                                
COMMISSIONER BUTCHER said there is a mix of production from both                                                                
that is now economic due to high prices.                                                                                        
                                                                                                                                
3:06:21 PM                                                                                                                    
                                                                                                                                
[HB 3001 was held over.]                                                                                                        

Document Name Date/Time Subjects
HB3001A.pdf HRES 4/20/2012 1:00:00 PM
HB3001
HB3001 DOR Fiscal Note 4.18.12.pdf HRES 4/20/2012 1:00:00 PM
HB3001
Gov Transmittal Letter to Speaker.pdf HRES 4/20/2012 1:00:00 PM
HB 3001 Sectional Analysis - DOR.pdf HRES 4/20/2012 1:00:00 PM
HB3001
HRES HB 3001 DOR Overview 4.20.12.pdf HRES 4/20/2012 1:00:00 PM
HB3001