Legislature(2013 - 2014)BARNES 124

03/25/2013 01:00 PM RESOURCES

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01:05:23 PM Start
01:05:42 PM SB21
06:50:54 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 4:40 p.m. Today --
Heard & Held
-- Testimony <Invitation Only> --
- PFC Energy & EconOne
+ Bills Previously Heard/Scheduled TELECONFERENCED
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
1:05:42 PM                                                                                                                    
CO-CHAIR FEIGE  announced that the  only order of business  is CS                                                               
FOR SENATE BILL NO. 21(FIN) am(efd  fld), "An Act relating to the                                                               
interest rate applicable to certain  amounts due for fees, taxes,                                                               
and payments  made and  property delivered  to the  Department of                                                               
Revenue; providing  a tax credit  against the  corporation income                                                               
tax  for qualified  oil and  gas  service industry  expenditures;                                                               
relating to the oil and gas  production tax rate; relating to gas                                                               
used in  the state; relating  to monthly installment  payments of                                                               
the  oil  and  gas  production  tax;  relating  to  oil  and  gas                                                               
production  tax  credits  for certain  losses  and  expenditures;                                                               
relating  to  oil and  gas  production  tax credit  certificates;                                                               
relating  to nontransferable  tax  credits  based on  production;                                                               
relating to the  oil and gas tax credit fund;  relating to annual                                                               
statements by  producers and explorers; establishing  the Oil and                                                               
Gas   Competitiveness  Review   Board;   and  making   conforming                                                               
1:06:03 PM                                                                                                                    
BARRY PULLIAM, Economist & Managing  Director, Econ One Research,                                                               
Inc.,   Los   Angeles,   California,   as   consultant   to   the                                                               
administration, provided a  PowerPoint presentation comparing the                                                               
differences between  CSSB 21(FIN) am(efd  fld), SB 21/HB  72, and                                                               
Alaska's Clear  and Equitable  Share (ACES).   He  first compared                                                               
the differences in the key  features of the aforementioned [slide                                                               
2], saying  the base tax  rate in SB 21/HB  72 of 25  percent was                                                               
changed to 35  percent in CSSB 21 (FIN) am(efd  fld).  No credits                                                               
were included in SB  21/HB 72, but a credit of  $5 per barrel was                                                               
added  in  CSSB 21(FIN)  am(efd  fld).    Under  SB 21/HB  72,  a                                                               
producer  without  tax  liability  could carry  forward  its  net                                                               
operating losses  (NOLs) at a  15 percent increase and  then take                                                               
the  NOLs once  the producer  did have  tax liability.   However,                                                               
CSSB  21(FIN) am(efd  fld)  allows for  monetization  of NOLs  so                                                               
producers that do  not have tax liability as  they are developing                                                               
new projects will receive a boost to their economics.                                                                           
1:08:42 PM                                                                                                                    
MR. PULLIAM, continuing his comparison  of the key features, said                                                               
SB 21/HB 72 provided a gross  revenue exclusion (GRE) at the rate                                                               
of  20 percent  applicable  to  units formed  after  2003 or  new                                                               
participating  areas  (PAs)  [formed  after 2012].    Under  CSSB
21(FIN)  am(efd fld),  this provision  remains the  same but  the                                                               
applicability is expanded to also  include certified new oil from                                                               
existing fields.   Under SB  21/HB 72, the small  producer credit                                                               
of $12 million per year was  extended to the year 2022, but under                                                               
CSSB 21(FIN) am(efd fld) this credit expires in 2016.                                                                           
1:10:28 PM                                                                                                                    
REPRESENTATIVE  SEATON,  referring  to  certified  new  oil  from                                                               
existing fields under CSSB 21(FIN)  am(efd fld), inquired whether                                                               
Mr. Pulliam  is just  presenting the  provisions of  CSSB 21(FIN)                                                               
am(efd   fld)  as   currently  written   or   will  be   offering                                                               
recommendations on whether these changes make sense.                                                                            
MR.  PULLIAM  replied his  intention  with  slide  2 is  just  to                                                               
highlight  the differences  between the  original bill,  SB 21/HB
72, and CSSB  21(FIN) am(efd fld), the bill that  came out of the                                                               
Senate.   As he goes along  he will be talking  about the impacts                                                               
on investment generally.                                                                                                        
REPRESENTATIVE SEATON  reserved his question on  the expansion of                                                               
the GRE until such time as Mr. Pulliam discusses it.                                                                            
1:11:26 PM                                                                                                                    
MR.  PULLIAM  returned  to  his  presentation  and  compared  the                                                               
government take  and effective  tax rates of  ACES, SB  21/HB 72,                                                               
and  CSSB 21(FIN)  am(efd  fld) for  all  existing producers  for                                                               
fiscal  years 2015-2019  [slide 3].   He  pointed out  that at  a                                                               
[($2012) West  Coast Alaska North  Slope (ANS)] price of  $80 per                                                               
barrel the  government take under  all three systems is  the same                                                               
[about 64  percent].  As  prices rise, the government  take under                                                               
CSSB 21(FIN) am(efd  fld) approaches 65 percent  [versus about 62                                                               
percent under SB 21/HB 72 and 75 percent under ACES].                                                                           
1:12:34 PM                                                                                                                    
REPRESENTATIVE  HAWKER, noting  Mr.  Pulliam is  engaged in  this                                                               
effort by  the administration, inquired  whether Mr.  Pulliam has                                                               
reconciled his modeling with the  existing producers so there are                                                               
no "dueling modeling" questions.                                                                                                
MR.  PULLIAM responded  he has  had considerable  back and  forth                                                               
with the producers and believes he is  on the same page as far as                                                               
the models  go.  One  difference, however, is that  producers may                                                               
present  numbers  during this  time  period  in nominal  dollars,                                                               
while the numbers he  is presenting here - as he  has done in all                                                               
of his presentations - are in 2012 real dollars.                                                                                
1:13:34 PM                                                                                                                    
MR. PULLIAM,  in response to Representative  P. Wilson, confirmed                                                               
that the  black line in  the graphs on  slide 3 labeled  "CS SB21                                                               
(FIN)"  is the  bill before  the committee  [CSSB 21(FIN)  am(efd                                                               
fld)].   When referring  to "CS  SB 21 (FIN)"  or to  "the Senate                                                               
bill," he is meaning the bill that came out of the Senate.                                                                      
1:14:02 PM                                                                                                                    
MR. PULLIAM,  in response to Representative  Tuck, confirmed that                                                               
royalty received by  the state is included in  the comparison for                                                               
government take on slide 3.   He said government take encompasses                                                               
all forms of government take,  including taxes and royalty.  Some                                                               
of the royalty is at 12.5 percent and some is higher.                                                                           
1:14:30 PM                                                                                                                    
MR. PULLIAM,  continuing his discussion of  the comparisons shown                                                               
on slide  3, said the bottom  graph shows the effective  tax rate                                                               
for  severance  that  taxpayers  would  pay  at  different  price                                                               
levels.   The effective  tax rate equals  the nominal  rate minus                                                               
the credits  that are received.   At a  price just above  $80 per                                                               
barrel, the effective tax rate for  all three systems is the same                                                               
at about 22.5 percent.  As  the price increases the effective tax                                                               
rate under  CSSB 21(FIN) am(efd  fld) rises to about  30 percent;                                                               
due to the manner in which it  is calculated - starting with a 35                                                               
percent base  rate and then  subtracting the fixed $5  per barrel                                                               
allowance  - the  tax  rate  at higher  and  higher prices  would                                                               
approach  35  percent  asymptotically but  would  never  actually                                                               
touch 35 percent.   That is because as the  $5 credit is deducted                                                               
from the taxes,  the tax rate on a percentage  basis is lower and                                                               
lower as prices go up.                                                                                                          
1:16:07 PM                                                                                                                    
MR.  PULLIAM, in  response to  Representative  Tuck, stated  that                                                               
royalty would not be included  in the effective tax rate depicted                                                               
on slide 3.                                                                                                                     
1:16:26 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked  whether  the  effective  tax  rate                                                               
depicted  on slide  3  is  a combination  of  production tax  and                                                               
corporate income tax.                                                                                                           
MR.  PULLIAM replied  the effective  tax rate  includes just  the                                                               
production tax.                                                                                                                 
1:16:42 PM                                                                                                                    
MR.  PULLIAM moved  to slide  4  and compared  the effective  tax                                                               
rates on gross  value for legacy production under  ACES, SB 21/HB
72, and  CSSB 21(FIN) am(efd fld)  with that of other  large oil-                                                               
producing states  with production  taxes at  a wellhead  value of                                                               
$100 ($2012).  Most other states  in the U.S., he explained, have                                                               
a gross tax while Alaska's current tax  is on the net.  Thus, for                                                               
comparison purposes on  this graph, he converted  Alaska's tax to                                                               
a percentage of the gross  value and, because Alaska's tax varies                                                               
with price, he chose for  this comparison the 2012 wellhead value                                                               
of  $100  per  barrel,  which   is  about  today's  value.    For                                                               
comparison  on  the chart  he  chose  states with  production  of                                                               
100,000  barrels  or more  per  day.    On  a gross  basis,  ACES                                                               
provides an effective  tax rate of about 30 percent,  SB 21/HB 72                                                               
provides about 17 percent, and  CSSB 21(FIN) am(efd fld) provides                                                               
20  percent  [compared  to  effective tax  rates  of  about  12.5                                                               
percent for LA, about 11 percent  for ND, about 8 percent for OK,                                                               
about 7  percent for NM,  about 6 percent  for WY, 5  percent for                                                               
CO, and about  4.5 percent for TX].  Thus,  he pointed out, while                                                               
CSSB 21(FIN)  am(efd fld) would  lower the rate seen  under ACES,                                                               
the proposed rate  would still be higher than those  of the other                                                               
major producing states in the U.S.                                                                                              
1:18:38 PM                                                                                                                    
REPRESENTATIVE SEATON,  referring to the wellhead  value of $100,                                                               
calculated that  "to get  to ANS" would  be approximately  $10 of                                                               
transportation.   With Alaska's  production taxes based  on gross                                                               
value  at  point  of  production,   he  asked  what  Mr.  Pulliam                                                               
subtracted from this as the actual taxable value.                                                                               
MR.  PULLIAM responded  he  is  starting here  with  $100 at  the                                                               
wellhead, so that would be the gross value of the production.                                                                   
1:19:17 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that production tax  value subtracts                                                               
out the cost, which is basically $26.                                                                                           
MR. PULLIAM answered  correct, under any of  the Alaska scenarios                                                               
the cost  must be subtracted  out and  then the tax  is computed.                                                               
To calculate  these percentages he  divided the tax by  the gross                                                               
value of the oil as opposed to the net value of the oil.                                                                        
1:19:51 PM                                                                                                                    
REPRESENTATIVE SEATON  asked whether that  is by the  gross value                                                               
at the point  of production, the taxable value,  or this wellhead                                                               
value,  meaning subtracting  just the  marine transportation  and                                                               
the cost  of the Trans-Alaska  Pipeline System (TAPS) to  get the                                                               
effective tax rate.                                                                                                             
MR. PULLIAM replied  that, in his view, gross value  at the point                                                               
of production  is the same as  wellhead value.  There  is taxable                                                               
value,  which then  would subtract  capital  and operating  costs                                                               
from the  gross value.  But  gross value and wellhead  value are,                                                               
in his mind, one and the same.                                                                                                  
1:20:42 PM                                                                                                                    
REPRESENTATIVE  SEATON   said  his  understanding  is   that  the                                                               
production tax  value is the  gross value at point  of production                                                               
and  that is  what Alaska  taxes, which  is minus  transportation                                                               
minus costs.                                                                                                                    
CO-CHAIR FEIGE  said his  interpretation is  that gross  value at                                                               
the wellhead  is the West  Coast price minus  the transportation.                                                               
Alaska taxes the  net production value, which is  the gross after                                                               
subtracting the  expenses, royalties,  and capital  and operating                                                               
expenses.   He  understood Mr.  Pulliam to  be saying  that after                                                               
taxing it the way Alaska normally  would, then based on the gross                                                               
this is how Alaska compares.                                                                                                    
MR. PULLIAM confirmed Co-Chair Feige's interpretation.                                                                          
1:21:31 PM                                                                                                                    
REPRESENTATIVE SEATON  understood, then,  that the  effective tax                                                               
rate is  based on  looking at  the ANS West  Coast minus  $10 and                                                               
what percentage of that is paid in tax.                                                                                         
MR. PULLIAM responded  correct.  So, at a wellhead  value - gross                                                               
value - of  $100, and a 20 percent effective  tax rate under CSSB
21(FIN) am(efd fld), the State  of Alaska would receive about $20                                                               
in taxes.   Under  ACES at  a wellhead value  of $100,  the state                                                               
would receive about  $30 in taxes, even though  the taxable value                                                               
is  not  $100,  but  something   lower  subtracting  capital  and                                                               
operating  expenses.   To be  able to  compare Alaska's  tax rate                                                               
with the other  tax rates in the  U.S., one or the  other must be                                                               
converted, and it was much easier  to convert Alaska's to a gross                                                               
equivalent and then compare.                                                                                                    
1:22:32 PM                                                                                                                    
CO-CHAIR  FEIGE  surmised  this  effective  tax  rate  would  not                                                               
include the application of any gross revenue exclusion (GRE).                                                                   
MR. PULLIAM answered  some GRE would be included  because this is                                                               
based on  production that is  forecast over the next  five years.                                                               
Thus, there would be a little  bit, but not a significant amount.                                                               
[See  timestamp  1:25:15 p.m.  where  Mr.  Pulliam corrects  this                                                               
answer,  saying the  graph on  slide 4  is for  legacy production                                                               
which  has  no GRE  and  therefore  no  GRE  is included  in  the                                                               
effective tax rate depicted in the graph.]                                                                                      
1:23:04 PM                                                                                                                    
CO-CHAIR SADDLER inquired  whether slide 4 is a  snapshot in time                                                               
now or looking forward.                                                                                                         
MR. PULLIAM replied it is looking forward.                                                                                      
CO-CHAIR SADDLER asked whether the  difference between Alaska and                                                               
other states  would increase  or decrease  if the  wellhead value                                                               
was at $80 per barrel and if it was at $120.                                                                                    
MR. PULLIAM responded as the price  is lowered, in Alaska the tax                                                               
as a  percentage of the gross  value will drop; and  as the price                                                               
is  raised, the  tax  as a  percentage of  the  gross value  will                                                               
1:23:42 PM                                                                                                                    
REPRESENTATIVE TUCK understood [the  effective tax rate] does not                                                               
include royalties.   He understood royalties in  North Dakota and                                                               
Texas are around 25 percent.   He asked whether his understanding                                                               
is correct and if it would affect the graph on slide 4.                                                                         
MR. PULLIAM  answered the  graph is simply  severance taxes.   In                                                               
other  states the  royalties with  state  and private  landowners                                                               
vary between  a low of one-eighth  and up to 25  percent for more                                                               
recent leases in some of the more productive Lower 48 areas.                                                                    
REPRESENTATIVE TUCK  asked whether  royalties should  be included                                                               
when comparing total government take.                                                                                           
MR. PULLIAM  replied those  pieces are  included when  looking at                                                               
government take.   He said  he will  provide slides later  in the                                                               
presentation that look at total government take.                                                                                
REPRESENTATIVE TUCK  surmised Alaska  would look better  in those                                                               
slides than it does in slide 4.                                                                                                 
MR. PULLIAM agreed Alaska is a  little bit closer when looking at                                                               
total government take.                                                                                                          
1:25:03 PM                                                                                                                    
REPRESENTATIVE  SEATON  inquired whether  the  graph  on slide  4                                                               
depicts a five-year look forward.                                                                                               
1:25:15 PM                                                                                                                    
MR.  PULLIAM first  corrected his  answer  to [Co-Chair  Feige's]                                                               
question of  1:22:32 p.m.,  saying the  graph on  slide 4  is for                                                               
legacy  production which  has  no  GRE and  therefore  no GRE  is                                                               
included in the effective tax rate depicted in the graph.                                                                       
MR.  PULLIAM  then  answered  Representative  Seaton's  question,                                                               
saying it  is a projection  over a  25-year period.   However, he                                                               
added, he  did look at  it over a 5-year  period and it  does not                                                               
look any different over a period of  5 years than it does over 25                                                               
since the analysis uses the real 2012 price.                                                                                    
1:25:54 PM                                                                                                                    
REPRESENTATIVE SEATON  surmised, then,  that this  calculation is                                                               
counting on oil being $185 per  barrel by year 25, and about $163                                                               
by year 20, and these are all rolled into the calculation.                                                                      
MR. PULLIAM  replied in nominal terms  he does not know  what the                                                               
number would be in year 25, but  said these are all done in terms                                                               
of 2012 real dollars, so an  inflation of 2.5 percent per year is                                                               
included in the calculation.                                                                                                    
1:26:38 PM                                                                                                                    
REPRESENTATIVE  SEATON  understood,   then,  that  everything  is                                                               
inflated at 2.5  percent, including the costs,  and therefore the                                                               
costs  in the  graph are  not inflated  at the  6.5 to  8 percent                                                               
history of the fields.                                                                                                          
MR.  PULLIAM responded  that is  not  correct, the  costs in  his                                                               
calculation are inflated at higher than 2.5 percent.                                                                            
REPRESENTATIVE  SEATON  requested  Mr.  Pulliam  to  provide  the                                                               
committee with those figures.                                                                                                   
1:27:12 PM                                                                                                                    
MR. PULLIAM resumed  his presentation, providing a  sample of how                                                               
the tax would  be calculated under CSSB 21(FIN)  am(efd fld) with                                                               
no production qualifying for the GRE  at the per barrel prices of                                                               
$80  West Coast  ANS, $100,  and  $120 [slide  5].   He said  his                                                               
assumptions included 100,000 barrels  in gross production at 12.5                                                               
percent  in  royalty barrels,  resulting  in  87,500 net  taxable                                                               
barrels.  Focusing  on the price of $100 a  barrel, he subtracted                                                               
$10 in transportation costs, arriving  at a wellhead value of $90                                                               
per barrel.   He then subtracted $30 in  lease expenses, arriving                                                               
at a taxable  value of $60 per barrel for  a total production tax                                                               
value of  $5,250,000.   A 35  percent tax  rate is  next applied,                                                               
arriving at $1,837,500.  The  $5 per barrel production allowance,                                                               
totaling  $437,500, is  subtracted  to  arrive at  a  tax due  of                                                               
$1,400,000.   This  tax  as  a percentage  of  the  net value  of                                                               
production  is 26.7  percent, and  as a  percentage of  the gross                                                               
value of production it  is 17.8 percent.  At a  price of $80, the                                                               
tax  percentages  drop   [to  22.5  percent  for   net  value  of                                                               
production and 12.9  percent for gross value of  production].  At                                                               
$120,  the tax  percentages  increase [to  28.8  percent for  net                                                               
value  of  production  and  20.9   percent  for  gross  value  of                                                               
1:29:14 PM                                                                                                                    
MR. PULLIAM  provided another sample  tax calculation,  this time                                                               
for  production qualifying  for  the 20  percent  GRE [slide  6].                                                               
Focusing on  a West Coast ANS  price of $100, he  calculated that                                                               
20 percent of the $90 wellhead  value is $18, which is subtracted                                                               
from  the  wellhead value,  as  is  the  $30 in  lease  expenses,                                                               
arriving at  a taxable value of  $42.  Multiplying $42  times the                                                               
taxable volume equals  $3,675,000 in production tax value.   At a                                                               
35 percent  tax rate, the tax  is $1,286,250.  The  $5 per barrel                                                               
production allowance, totaling  $437,500, is subtracted, arriving                                                               
at a total tax of $848,750.  This  tax as a percentage of the net                                                               
value of production  is 23.1 percent, and as a  percentage of the                                                               
gross value  of production it  is 10.8 percent.   [At a  price of                                                               
$80 per barrel the percentages  are 15.8 percent and 5.9 percent,                                                               
respectively, and  at $120 the  percentages are 26.4  percent and                                                               
13.9 percent, respectively.]                                                                                                    
1:31:30 PM                                                                                                                    
MR. PULLIAM  next summarized how  state support, or  credits, for                                                               
capital spending  work under ACES  and under CSSB  21(FIN) am(efd                                                               
fld) at  a West  Coast ANS  price of $100  ($2012) and  a capital                                                               
spend of  $1 billion [slide 7].   Under ACES, an  incumbent would                                                               
get  a 20  percent  qualified capital  expenditure (QCE)  credit,                                                               
which  would amount  to $200  million.   An incumbent  would also                                                               
have  a   tax  reduction  because   of  the  higher   per  barrel                                                               
expenditure  and  the effect  of  buying  down  the tax  rate  on                                                               
existing production.   The total value of the  credit and buydown                                                               
to an incumbent  would be about $780 million.   A new participant                                                               
under ACES  would have  the same  20 percent  QCE credit  of $200                                                               
million and would also be  eligible to monetize its net operating                                                               
loss  (NOL) at  25  percent, for  a total  credit  of about  $450                                                               
million.   Thus, ACES  provides a higher  value to  the incumbent                                                               
than to  the new  participant.  Under  CSSB 21(FIN)  am(efd fld),                                                               
the values  to both the  incumbent and the new  participant would                                                               
be  equal at  an upfront  credit  of effectively  35 percent  for                                                               
$1 billion in  capital spending.   For the incumbent,  the credit                                                               
will be  in the  form of  a tax  reduction because  the incumbent                                                               
will be able to immediately expense  its capital spending.  A new                                                               
participant without a tax liability  will be able to monetize its                                                               
capital spending in the form of a credit with the state.                                                                        
1:34:54 PM                                                                                                                    
MR. PULLIAM  reviewed the  $5 per  barrel production  credit from                                                               
the perspective  of its worth  when thought about  as replacement                                                               
of the current capital credit [slide  8].  He explained the chart                                                               
depicts  the  relationship  between   capital  spending  and  the                                                               
percentage on a net present value  (NPV) basis of that $5 credit.                                                               
Under CSSB  21(FIN) am(efd fld),  each barrel  of oil gets  $5 of                                                               
credit  as it  comes in  over the  years.   A field  producing 50                                                               
million barrels over  25 years would get a total  of $250 million                                                               
from this allowance.   Since it would be coming  over the life of                                                               
the production  of the field,  that $250 million is  brought back                                                               
to the time  that the capital is spent to  develop the field; the                                                               
sum arrived  at is the  net present value  of it, let's  say $150                                                               
million.  Looking  at that sum, that net present  value of the $5                                                               
credit, as  a percentage of  the producer's  capital expenditure,                                                               
gives a  sense of  what this  credit is  providing, what  kind of                                                               
offset  it is  providing  if  it is  looked  at  relative to  the                                                               
capital being spent  - that is what  is done in this  chart.  For                                                               
example, at a per barrel capital spend  of $20 the NPV is about 8                                                               
percent.  So, if spending $20  per barrel to develop a field, the                                                               
production  credit would  translate  to about  8  percent of  the                                                               
amount of that capital expenditure on a net present value basis.                                                                
1:37:33 PM                                                                                                                    
MR. PULLIAM,  in response  to Representative  Seaton, said  he is                                                               
using a discount rate of 12.5 percent in this example.                                                                          
1:37:44 PM                                                                                                                    
REPRESENTATIVE SEATON  asked whether an inflation  of 2.5 percent                                                               
per year is used over time.                                                                                                     
MR.  PULLIAM answered  he does  inflate that  by 2.5  percent for                                                               
each of  the years.   However, he  pointed out, that  spending is                                                               
going to all occur  pretty much in the first five  years.  The $5                                                               
per  barrel  credit does  not  inflate;  it  remains just  $5  in                                                               
nominal  terms across  the  time of  the  production because  the                                                               
credit is structured such that it  has no inflation aspect to it.                                                               
In  further response,  he posed  a scenario  of spending  $20 per                                                               
barrel to  develop a  field of  50 million  barrels, for  a total                                                               
upfront expenditure of  $1 billion.  Against that  $1 billion, if                                                               
50 million  barrels is  produced, the producer  will get  cash of                                                               
$250 million over time.  That  $250 million divided by $1 billion                                                               
is 25 percent.   This chart brings back that $5  a barrel that is                                                               
received over time  and looks at it on a  net present value basis                                                               
- how a producer might be looking  at this as the kind of support                                                               
it  is  getting  in  a  credit.   From  that  standpoint,  it  is                                                               
appropriate to look at that $5  value, the present value of that,                                                               
at the time the  capital is spent.  What the value  is of that $5                                                               
essentially at the time the capital is spent.                                                                                   
1:40:19 PM                                                                                                                    
REPRESENTATIVE SEATON understood, then,  that this calculation is                                                               
based on  the expenditure occurring  at the start and  nothing is                                                               
spent through time that calculates into this.                                                                                   
MR.  PULLIAM replied  this is  assuming the  capital is  spent up                                                               
front during the first five years of developing the field.                                                                      
CO-CHAIR FEIGE  interjected that this  is when all the  wells are                                                               
drilled and the pipelines put in.                                                                                               
MR. PULLIAM confirmed it is when the facilities are put in.                                                                     
1:41:06 PM                                                                                                                    
MR.  PULLIAM resumed  his  presentation, turning  to  slide 9  to                                                               
discuss the  effective tax  rate for a  new participant  with and                                                               
without the  GRE under CSSB 21(FIN)  am(efd fld) on both  a gross                                                               
and a net basis.  He first  posed a scenario of a new development                                                               
with no  GRE at a  $20-per-barrel cost  of development.   In this                                                               
scenario,  the effective  tax  rate on  the  gross, or  wellhead,                                                               
value would be a little over 0  percent at a West Coast ANS price                                                               
of  $60 per  barrel  in 2012  dollars, rising  to  just below  20                                                               
percent  at  $110, and  approaching  25  percent  at $160.    The                                                               
effective tax rate  on the net, or taxable, value  would be about                                                               
5  percent at  a per  barrel  price of  $60, rising  to about  30                                                               
percent at $110, [on up to about 31 percent at $160].                                                                           
1:43:02 PM                                                                                                                    
CO-CHAIR SADDLER requested a definition of "asymptotically."                                                                    
MR.  PULLIAM  explained  something  approaching  "asymptotically"                                                               
means it gets  closer and closer but never exactly  touches.  For                                                               
example, the  effective tax rate  under CSSB 21(FIN)  am(efd fld)                                                               
will approach  35 percent, but  it will  never touch it  and that                                                               
relationship can be seen in the charts on slide 9.                                                                              
1:44:33 PM                                                                                                                    
MR. PULLIAM continuing  his discussion of the  effective tax rate                                                               
depicted  on slide  9, posed  the same  new development  scenario                                                               
under CSSB 21(FIN)  am(efd fld), but this time with  the GRE.  On                                                               
a gross  basis, the effective tax  rate would be above  0 percent                                                               
beginning  at a  per  barrel price  of $70,  rising  to about  15                                                               
percent at  $130.  On a  net basis, the effective  tax rate would                                                               
be above 0  percent at a price of about  $70, reaching 20 percent                                                               
at $120  per barrel.   Thus, the GRE  has the effect  of reducing                                                               
the effective  tax rate on production.   At very low  prices with                                                               
the GRE, he  noted, it can go into a  negative tax rate situation                                                               
due to the 35 percent monetization of the net operating loss.                                                                   
1:45:35 PM                                                                                                                    
REPRESENTATIVE TARR inquired  how low the price would  have to go                                                               
for that negative situation to happen.                                                                                          
MR. PULLIAM  responded in this example  it would be at  about $70                                                               
per  barrel  West  Coast.    He pointed  out  this  is  currently                                                               
happening under  ACES, just at  a higher  level of 45  percent as                                                               
opposed  to a  35  percent level.   Elaborating,  he  said it  is                                                               
happening at least  at a 45 percent level for  a new producer and                                                               
at a higher level for an incumbent.                                                                                             
1:46:11 PM                                                                                                                    
CO-CHAIR  SADDLER understood  Mr. Pulliam  to be  saying that  at                                                               
prices  below $70  a  barrel with  the GRE,  the  state would  be                                                               
losing money.                                                                                                                   
MR.  PULLIAM  answered  for  a  new development  it  could  be  a                                                               
negative tax  situation for  the state  if prices  did not  go up                                                               
above $70 a barrel.  In  other words, the state would expend more                                                               
in monetizing the  net operating loss up front than  it would get                                                               
back in  taxes over  the life of  the field.   Just the  tax take                                                               
would  be  negative,  he  added;   the  state  would  be  getting                                                               
royalties, so the total take to the state would not be negative.                                                                
1:47:09 PM                                                                                                                    
MR. PULLIAM resumed  his discussion of the effective  tax rate on                                                               
gross and net  value, reviewing the rates under  ACES [slide 10].                                                               
Under ACES,  he said, the  effective tax  rates on the  gross and                                                               
net values  are generally higher  for a new participant  than for                                                               
an incumbent.   This is because the incumbent has  the ability to                                                               
buy  down its  rate on  its other  production by  having the  new                                                               
1:48:08 PM                                                                                                                    
REPRESENTATIVE SEATON requested Mr.  Pulliam to elaborate further                                                               
on the effective tax rate.                                                                                                      
MR. PULLIAM stated that with  GRE under CSSB 21(FIN) am(efd fld),                                                               
the tax is  negative at a price of about  $70, whereas under ACES                                                               
it would be negative at $60.                                                                                                    
1:48:58 PM                                                                                                                    
REPRESENTATIVE  SEATON   recalled  that   when  ACES   was  being                                                               
constructed  the thought  was  that some  good  years would  give                                                               
quite a  bit of revenue  to balance  that, allowing the  state to                                                               
take that liability  on the low end.  [Under  CSSB 21(FIN) am(efd                                                               
fld)], he observed, the  low end is moved out so  the state has a                                                               
liability but is not getting  the relative counter-balance on the                                                               
high end to put something in the  bank to be able to absorb those                                                               
losses.  Therefore,  he asked, how does CSSB  21(FIN) am(efd fld)                                                               
with the GRE  make the state more secure when  looking at $70 and                                                               
below and the state is subsidizing production taxes.                                                                            
MR. PULLIAM  agreed the  state would be  in a  negative situation                                                               
with the GRE.   The way it makes the state  more secure, he said,                                                               
is that  the state is  more apt to  get the development  of those                                                               
additional barrels  with the rates  that have been  proposed with                                                               
the GRE.  If prices were below  $70, the state would find it hard                                                               
to get much  activity because that is a  pretty challenging price                                                               
range for development on the North Slope.                                                                                       
1:50:47 PM                                                                                                                    
CO-CHAIR FEIGE  pointed out  that in  the near  term most  of the                                                               
production would not have the GRE applied to it.                                                                                
MR.  PULLIAM concurred,  noting that  at lower  price ranges  the                                                               
effective  tax rate  on gross  and net  value under  CSSB 21(FIN)                                                               
am(efd fld) with  no GRE pretty much tracks the  rate under ACES.                                                               
Above a price of $80 the two diverge.                                                                                           
REPRESENTATIVE SEATON  remarked it is  a question of  whether the                                                               
state wants  a design where it  subsidizes production development                                                               
out of  royalty; it is a  question as to what  kind of long-range                                                               
liability that produces for the state.                                                                                          
1:52:18 PM                                                                                                                    
REPRESENTATIVE TARR  commented the third  way to qualify  for the                                                               
GRE is  not as well  understood as the  first two ways,  plus the                                                               
third way  is at the discretion  of the commissioner.   She asked                                                               
Mr. Pulliam how he determined  what oil development would qualify                                                               
for the GRE under CSSB 21(FIN)  am(efd fld) when he developed the                                                               
graphs on slides 9-10.                                                                                                          
MR.  PULLIAM replied  he is  looking at  it as  being either  one                                                               
situation or  another, so he  did not try  to draw the  graphs to                                                               
say the  percentage that would or  would not.  The  lower line on                                                               
the graph represents that 100  percent of the barrels qualify for                                                               
the  GRE and  the  higher line  on the  graph  represents that  0                                                               
percent of  the barrels qualify for  the GRE.  The  actual mix of                                                               
oil over time is going to be some combination of those two.                                                                     
1:53:36 PM                                                                                                                    
MR. PULLIAM  commenced his presentation,  turning to slide  11 to                                                               
compare the  investment metrics  for a new  participant for  a 50                                                               
million  barrel   development  scenario   at  a   mid-range  cost                                                               
assumption under ACES  and under CSSB 21(FIN)  am(efd fld) versus                                                               
benchmark areas  in the  U.S. and  around the world.   At  a 12.5                                                               
percent royalty  rate, the  net present value  (NPV) at  $100 per                                                               
barrel under ACES is $3.09 while  under the Senate bill it nearly                                                               
doubles to $5.93.   Under the Senate bill this  would all be with                                                               
the  GRE because  it is  new development,  he pointed  out.   For                                                               
offshore  Gulf  of  Mexico  [the  NPV is  $6.22].    He  directed                                                               
attention to the other measures  of profitability index, internal                                                               
rate of return (IRR), and  cash margins, stating the cash margins                                                               
are  better under  the Senate  bill than  under ACES.   He  noted                                                               
government take  is nearly  14 percentage  points less  under the                                                               
Senate bill than under ACES,  bringing it out of the unattractive                                                               
range   and   into  the   attractive   range   relative  to   the                                                               
opportunities that producers would have elsewhere.                                                                              
1:56:44 PM                                                                                                                    
MR. PULLIAM moved to a comparison  of these same economics for an                                                               
incumbent [slide  12].   Under the Senate  bill, he  pointed out,                                                               
the columns for 12.5 percent  royalty rate and 16.67 royalty rate                                                               
look pretty  much the same  as they  do for the  new participant.                                                               
On  these  incremental investment  analyses,  the  ability of  an                                                               
incumbent to  buy down  its existing tax  rate increases  the NPV                                                               
and IRR  relative to a  new participant.   So, for  an incumbent,                                                               
there is  not much of  a change when  going between ACES  and the                                                               
Senate bill on an incremental basis.                                                                                            
1:57:52 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired what the  number of years  is for                                                               
this scenario.                                                                                                                  
MR. PULLIAM  believed most of  the production here would  go over                                                               
25  years.   Two thirds  of the  oil, he  added, is  going to  be                                                               
produced in the first 10 years.                                                                                                 
1:58:19 PM                                                                                                                    
REPRESENTATIVE SEATON requested these  charts be prepared for the                                                               
committee in nominal dollars because  inflating it to 2.5 percent                                                               
changes  completely the  calculations where  there is  or is  not                                                               
progressivity.   At a  price of $185  per barrel  the calculation                                                               
completely changes, he  said.  Both the legacy  producers and new                                                               
entrants  have testified  that they  make their  calculations and                                                               
decisions on  nominal dollars, not 2.5  percent inflated dollars.                                                               
If these charts are prepared in  nominal dollars, then a price of                                                               
$100 per barrel will be $100 throughout the calculation.                                                                        
MR.  PULLIAM responded  he can  produce  charts that  way if  the                                                               
committee  likes,  but  he  strongly  cautioned  members  against                                                               
drawing  any meaningful  conclusions from  that kind  of analysis                                                               
because he  does not think  it is correct.   He said he  does not                                                               
think it will  provide an appropriate way to look  at the problem                                                               
and he does  not think it is  the way industry would  look at the                                                               
problem either.  In particular with  a system like ACES, it would                                                               
be  problematic  to ignore  that  inflation  over time  pushes  a                                                               
company's tax rates higher.  He  further noted that going all the                                                               
way back  to 2006, all the  charts and presentations for  PPT and                                                               
ACES were done this same way.                                                                                                   
2:00:58 PM                                                                                                                    
MR. PULLIAM,  returning to his  presentation, said the  charts on                                                               
slides 13-16  are the  same as  the last  two slides  except they                                                               
change the cost assumptions [which can  be found at the bottom of                                                               
each slide].   He therefore left the charts for  members to study                                                               
on their own.                                                                                                                   
2:01:33 PM                                                                                                                    
MR. PULLIAM  next looked at  the cash flows  to the state  and to                                                               
new and  incumbent producers under  ACES and CSSB  21(FIN) am(efd                                                               
fld) using  a scenario of  $100 West Coast  ANS ($2012) and  a 50                                                               
million barrel oil development at  mid-range cost [slides 17-18].                                                               
He said the  relationships between these two bills  do not change                                                               
relative  to what  he presented  to the  committee at  an earlier                                                               
hearing [January 24, 2013, slides 59-60].                                                                                       
2:02:08 PM                                                                                                                    
MR. PULLIAM  then reviewed  the annual producer  cash flows  to a                                                               
new participant and  to an incumbent under ACES  and CSSB 21(FIN)                                                               
am(efd fld) using  the same aforementioned scenario  of $100 West                                                               
Coast  ANS ($2012)  and a  50 million  barrel oil  development at                                                               
mid-range  cost [slide  19].   For both  an incumbent  and a  new                                                               
participant,  spending occurs  up  front  with revenues  starting                                                               
about year five.   Under ACES, the incumbent's  spending is lower                                                               
than  that of  the  new participant's  because  of the  increased                                                               
subsidy  upfront through  the effect  of the  buydown of  the tax                                                               
rate.  The result of this  difference is that the incumbent has a                                                               
higher  net  present  value  [$277 million]  than  does  the  new                                                               
participant [$131 million].  Under  CSSB 21(FIN) am(efd fld), the                                                               
upfront  spending and  revenues  are virtually  identical for  an                                                               
incumbent  and  a new  participant  because  these two  different                                                               
classes  of producers  are now  being  treated identically  under                                                               
this proposed tax system.                                                                                                       
2:03:43 PM                                                                                                                    
CO-CHAIR SADDLER observed that under ACES  in year four, a bar is                                                               
seen for the new participant but none is seen for the incumbent.                                                                
MR.  PULLIAM said  the bar  [for  the incumbent]  cannot be  seen                                                               
because it is probably right at the zero line.                                                                                  
2:04:11 PM                                                                                                                    
MR. PULLIAM  turned to discussing  what he calls  the "break-even                                                               
analysis" [slide  20], which addresses  how much  new development                                                               
it would  take to  offset the  revenue being  lost by  going from                                                               
ACES  to CSSB  21(FIN)  am(efd fld).   He  pointed  out that  the                                                               
fiscal notes put out by  the [Department of Revenue (DOR)] assume                                                               
there  is  no  change  in   production;  the  fiscal  notes  hold                                                               
everything constant and look at  what the different tax rates do.                                                               
Of course,  it is known  that tax rates affect  profitability and                                                               
profitability  is  going to  affect  investment  decisions.   The                                                               
question  everyone has  is whether  the state  will get  more oil                                                               
production and  will it make  up for the  tax cut.   He explained                                                               
slide 20 looks  at how much more  oil is needed for  the State of                                                               
Alaska to  break even revenue-wise.   Using [DOR's]  forecast and                                                               
the assumptions of a mid-cost  [$20 per barrel] development and a                                                               
West Coast ANS  price ($2012) of $105, he looked  at revenues the                                                               
state could expect to generate on  a per barrel basis at the one-                                                               
sixth royalty  rate [16.67  percent], which  would be  mostly new                                                               
development, and at the one-eighth royalty rate [12.5 percent].                                                                 
2:06:07 PM                                                                                                                    
MR.  PULLIAM said  the revenues  generated over  time under  CSSB
21(FIN) am(efd  fld) at [16.67  percent] royalty would  amount to                                                               
$35.50  a barrel  in nominal  dollars  and $25.75  in real  terms                                                               
(2012 dollars).   Additionally, each new barrel  flowing down the                                                               
Trans-Alaska Pipeline  System (TAPS)  would help spread  the cost                                                               
of TAPS  and reduce the  per barrel tariff.   The impact  of that                                                               
reduction would  increase state revenue  by $3.50 per  new barrel                                                               
($2012).  He clarified the reduction  in the tariff is not $3.50,                                                               
the reduction  is much smaller  than that; however,  expressed in                                                               
total  dollars in  savings to  the state  across each  new barrel                                                               
produced, it  works out to about  $3.50 for each new  barrel.  At                                                               
12.5  percent royalty,  each  new barrel  would  generate $23  in                                                               
production  revenue  and  $3.50  in additional  savings  on  TAPS                                                               
tariffs, for a total of $28.50.   Looking at the projected impact                                                               
over  the  next  30  years assuming  no  production  change,  Mr.                                                               
Pulliam said  the nominal difference  would be about  $17 billion                                                               
and, in 2012  real dollars, it would be about  $12.9 billion.  To                                                               
make up those  dollars at the aforementioned  per barrel amounts,                                                               
it would  take 441 million  barrels at 16.67 percent  royalty and                                                               
487 million  barrels at 12.5  percent royalty.  At  16.67 percent                                                               
royalty,  this  equates to  needing  to  develop 15  million  new                                                               
barrels per year,  or 40,000 new barrels a day,  over the next 30                                                               
years.    At 12.5  percent  royalty,  it  equates to  needing  to                                                               
develop 16 million new barrels per  year, or 44,000 new barrels a                                                               
day, over  the next 30 years.   Regarding how that  amount of new                                                               
development  relates to  estimates of  what is  left to  find, he                                                               
said that  on state  lands just  in the  Central North  Slope the                                                               
estimate  is  3  billion  barrels  of  undiscovered  economically                                                               
recoverable oil at  $90 a barrel.  Per year,  that is 0.5 percent                                                               
of what is left.                                                                                                                
2:09:21 PM                                                                                                                    
CO-CHAIR SADDLER requested Mr. Pulliam  to interpret the chart on                                                               
slide 20 in one or two sentences.                                                                                               
MR. PULLIAM  replied the sentence is  how much more oil  needs to                                                               
be developed for  the state to break even with  the revenues that                                                               
are estimated  will be lost in  moving from ACES to  CSSB 21(FIN)                                                               
am(efd fld).                                                                                                                    
CO-CHAIR SADDLER understood  the answer to be  15 million barrels                                                               
per year,  each year, for 30  years; or [a total  of] 441 million                                                               
[barrels] over that 30 years.                                                                                                   
MR.  PULLIAM confirmed  it would  be about  15 million  barrels a                                                               
year of new oil for a total  amount of between 440 million to 487                                                               
million  barrels.   In further  response,  Mr. Pulliam  confirmed                                                               
that each year the production  equivalent of 40,000 barrels would                                                               
have to  be added per day  over the production that  is forecast.                                                               
He said this example assumes it  is all new production and he has                                                               
applied the  GRE to all  of this as well  as the $5  [per barrel]                                                               
credit.   If additional oil is  brought on that does  not qualify                                                               
for the GRE, then the volumes required would be lower.                                                                          
2:10:46 PM                                                                                                                    
REPRESENTATIVE  TARR  asked  what   discount  rate  was  used  to                                                               
calculate  breaking even.   She  further asked  what year  during                                                               
this period  of 30  years was  assumed for  when the  new barrels                                                               
would come on line.                                                                                                             
MR.  PULLIAM responded  the figures  are  all done  in real  2012                                                               
dollars,  so the  discount rate  is implicitly  2.5 percent.   He                                                               
believed his assumption was four years  from now for when new oil                                                               
would start coming on line.                                                                                                     
2:11:31 PM                                                                                                                    
MR. PULLIAM  resumed his presentation, addressing  how reasonable                                                               
it is that this new production  will happen.  There is no formula                                                               
that  will predict,  he noted,  but  it can  be looked  at as  to                                                               
whether this is  or is not a  gargantuan task.  As  seen on slide                                                               
20, what  needs to  be developed is  0.5 percent  of undiscovered                                                               
resources  each year;  over 30  years that  is about  15 percent.                                                               
From the  standpoint of physical  capability that would  not seem                                                               
to be an  unreasonable amount, but what would  that take capital-                                                               
wise?    Assuming  a  development  cost of  $20  per  barrel,  he                                                               
calculated it would be about $300 million [slide 21].                                                                           
2:12:40 PM                                                                                                                    
MR. PULLIAM,  in response to  Co-Chair Saddler,  reiterated there                                                               
is  [an estimated]  3 billion  barrels of  undiscovered oil.   In                                                               
further  response he  confirmed  that 0.5  percent  of 3  billion                                                               
barrels  would have  to be  found and  produced per  year, for  a                                                               
total of about 15 percent [of  the 3 billion barrels].  Thus, new                                                               
production does  not have to be  more than what is  thought to be                                                               
left and economically available.                                                                                                
CO-CHAIR SADDLER  surmised, then, that  this is not a  pipe dream                                                               
and is within the realm of possibility.                                                                                         
MR. PULLIAM concurred.                                                                                                          
2:14:03 PM                                                                                                                    
MR. PULLIAM  returned to slide  21, saying  that at a  per barrel                                                               
development  cost  of  $20,  about [$300  million]  per  year  in                                                               
additional  investment would  be needed.   Relative  to the  $2.4                                                               
billion  invested in  2012, this  would be  about a  12.5 percent                                                               
increase in investment, so not a gargantuan level of increase.                                                                  
2:14:40 PM                                                                                                                    
REPRESENTATIVE  TARR recalled  hearing that  some of  the current                                                               
investment is related to the  credits [under ACES], some of which                                                               
would  be  going  away  under  CSSB 21(FIN)  am(efd  fld).    She                                                               
inquired what the impact would  be given that CSSB 21(FIN) am(efd                                                               
fld) removes 10  percent of the incentive available  now for some                                                               
of that capital investment.   She further recalled criticism that                                                               
the [current] credits  have not lead to new  production and asked                                                               
whether there should  be a more critical look at  where that $2.4                                                               
billion was spent to see the impact of where those dollars go.                                                                  
MR. PULLIAM, regarding whether the  credit coming down would make                                                               
the spending  less likely, answered  he would say no  because the                                                               
credit  is a  part  of  an overall  system.    While the  current                                                               
overall  system has  a  higher level  of credit,  it  has a  much                                                               
higher level of  take once the oil starts to  be produced; so the                                                               
overall economics are  not as attractive as the  lower credit and                                                               
the  lower take  proposed under  CSSB  21(FIN) am(efd  fld).   He                                                               
added he  does not  think there  is any  question about  that and                                                               
cautioned against  getting wrapped  up in  the credit  by itself.                                                               
For example,  taken to an extreme,  there could be an  80 percent                                                               
credit, but  a tax of 90  percent, and this would  take the state                                                               
the  other way.    The credit  must  be treated  as  part of  the                                                               
overall  package because  how the  investment economics  work for                                                               
that package is how it is looked at.                                                                                            
MR.  PULLIAM,  regarding  Representative Tarr's  second  question                                                               
that some  of this money was  spent in other ways,  said he hopes                                                               
it is  not being spent  in ways that  do not lead  to production.                                                               
However, even if it did, it is  part of this $2.4 billion and how                                                               
much  more is  needed to  get to  the development  of 15  million                                                               
barrels  a year.    It is  really that  increment  that is  being                                                               
talked about, and that increment  is about $300 million, which is                                                               
12.5 percent of what  was spent in 2012.  It gives  a sense as to                                                               
how gargantuan is this task.                                                                                                    
2:17:30 PM                                                                                                                    
REPRESENTATIVE   SEATON   expressed  skepticism   regarding   Mr.                                                               
Pulliam's answer  to Representative Tarr's question  about the 10                                                               
percent  loss in  credit, saying  those are  dollars now  for new                                                               
development.  While  CSSB 21(FIN) am(efd fld) says  that 10 years                                                               
from now when a producer has  some oil flowing there will be less                                                               
take, it  also says  the small  producer must  spend at  least 10                                                               
more years.   Additionally, the  Senate bill would take  away the                                                               
small producer tax  credit and when production  started the small                                                               
producer would immediately have to start  paying tax.  He said he                                                               
would like to see more analysis  than just a statement, given the                                                               
small producers have told the  committee that [HB 72/SB 21] would                                                               
probably change  their decisions  of investing in  Alaska because                                                               
of the  risk and long-term investment.   A promise in  the future                                                               
and more  expense now changes  the risk/reward for  other options                                                               
the small producers have, such as  in the Lower 48.  He requested                                                               
Mr. Pulliam to discuss this issue further.                                                                                      
2:19:15 PM                                                                                                                    
MR. PULLIAM  replied he has  had discussions and has  listened to                                                               
all  of  the  testimony  of   the  small  producers.    In  those                                                               
discussions  the  small  producers  were  focused  on  SB  21  as                                                               
introduced;  that version  provided  no ability  to monetize  the                                                               
losses, so  the small producers  would have gone from  being able                                                               
to monetize  45 percent of  their expenditure to having  to carry                                                               
forward that  full amount.   In his  view, the one  producer most                                                               
concerned about that was Pioneer  Natural Resources Alaska, Inc.;                                                               
however,  viewed as  a  package,  he said  he  thinks the  others                                                               
looked at the change more favorably.   As the bill worked its way                                                               
through the  Senate the small  producers came back and  talked to                                                               
that body; he suggested committee  members particularly listen to                                                               
Armstrong   Oil  &   Gas,  Inc.   and   Brooks  Range   Petroleum                                                               
Corporation.   Although  he did  not recall  Pioneer coming  back                                                               
after  the changes  proposed in  the  Senate, he  said he  thinks                                                               
Pioneer  views  the package  as  being  very favorable  and  pro-                                                               
MR.  PULLIAM, regarding  more  analysis, referred  Representative                                                               
Seaton to the  chart on slide 11  in which a lot  of analysis was                                                               
done  looking  at  the  value  and  investment  metrics  of  this                                                               
proposal.  Mr. Pulliam contended  the proposal undoubtedly raises                                                               
the value of  this investment on any level to  a new participant,                                                               
even  without  the additional  10  percent  credit or  the  carry                                                               
forward of  the small producer tax  credit.  He pointed  out that                                                               
the NPV  is doubled, the  profitability index (PI)  is increased,                                                               
the internal  rates of return  (IRR) go  up, the cash  margins go                                                               
up,  and the  government  take goes  down.   Sure,  if  he was  a                                                               
producer getting credits  he like to keep getting  those and also                                                               
have lower taxes.  However,  he continued, the package under CSSB
21(FIN)  am(efd  fld),  from  the  standpoint  of  either  a  new                                                               
participant  or incumbent,  is much  stronger from  an investment                                                               
standpoint than what Alaska has under ACES.                                                                                     
2:21:52 PM                                                                                                                    
CO-CHAIR  SADDLER  inquired whether  it  is  true that  replacing                                                               
credits, like  the current  qualifying capital  expenditure (QCE)                                                               
credit that  does not  necessarily lead  to production,  with the                                                               
GRE and the $5-per-barrel credit  will lead to investment that is                                                               
more efficient or more focused on actual production.                                                                            
MR. PULLIAM offered  his belief that it will and  is a better way                                                               
of  providing the  kind of  incentive to  get additional  barrels                                                               
than simply having the QCE credit.                                                                                              
2:22:29 PM                                                                                                                    
MR. PULLIAM, resuming his discussion  of the reasonableness test,                                                               
displayed a  graph [slide 22]  of the estimated  capital spending                                                               
for exploration and development  on Alaska's North Slope compared                                                               
to spending in the  rest of the U.S. and the  world for the years                                                               
2003-2012.   Over that  time period,  he said,  Alaska's spending                                                               
went up about 250 percent  total, whereas worldwide spending went                                                               
up about  400 percent  and U.S.  spending went  up a  little more                                                               
than 450  percent.  Keeping these  numbers in mind, he  turned to                                                               
another  reasonableness test  depicted on  slide 23,  noting that                                                               
had investment  in Alaska kept pace  with the rest of  the world,                                                               
an additional  $1.6 billion  would have been  spent in  Alaska in                                                               
2012.    Responding  to  Co-Chair  Saddler,  he  reiterated  that                                                               
worldwide  spending went  up 400  percent over  the last  decade.                                                               
Spending  in  Alaska  in  2003  was about  $1  billion,  and  had                                                               
spending in  the state  gone up  at the  same rate  as worldwide,                                                               
Alaska would have been at $4  billion in spending in 2012 instead                                                               
of  the  actual  $2.4  billion, a  difference  of  $1.6  billion.                                                               
Continuing, he said  he is asking the question of  what that $1.6                                                               
billion would  turn into  in terms  of development.   At  $20 per                                                               
barrel [in  production cost] it  is about 80 million  barrels and                                                               
Alaska needs 15  million barrels a year; so,  from the standpoint                                                               
of keeping up with the Jones's, Alaska would be there.                                                                          
2:24:37 PM                                                                                                                    
REPRESENTATIVE TARR  inquired how  the unique situation  of joint                                                               
operating agreements  on the  North Slope is  accounted for.   In                                                               
the past,  she said, expenditures  desired by some  partners were                                                               
vetoed by  one of the  partners so that  the spending did  not go                                                               
MR. PULLIAM disagreed the North  Slope joint operating agreements                                                               
are  unique.    He  said there  are  joint  operating  agreements                                                               
worldwide  that require  agreement  amongst owners  and that  are                                                               
operated in  similar ways as on  the North Slope.   Rarely does a                                                               
big field  have just one owner;  therefore, he would say  that is                                                               
one thing that  makes them comparable.   Additionally, in looking                                                               
at  effects  over  time  since  2003, the  same  issue  of  joint                                                               
operating agreements remains  on the North Slope, so  he does not                                                               
try to untangle that  from the analysis.  It is  an issue, but it                                                               
is an issue in  Alaska as well as elsewhere and  he does not know                                                               
that  it  could be  untangled  from  analysis  even if  that  was                                                               
2:26:32 PM                                                                                                                    
REPRESENTATIVE  TARR asked  whether  it is  possible  to get  the                                                               
representative  companies and  actual  data used  to produce  the                                                               
graph on slide 22.                                                                                                              
MR. PULLIAM responded  that, with respect to the  North Slope, he                                                               
does not think  he can provide the underlying data  because it is                                                               
confidential,  but he  can provide  it in  aggregate form.   With                                                               
respect to the others, he said  he does have the details for some                                                               
of the years as opposed to just the aggregate.                                                                                  
CO-CHAIR FEIGE  noted this  is a repeating  issue that  comes up.                                                               
Based on the confidentiality of  these tax returns, he continued,                                                               
at least three of them must be aggregated to provide a number.                                                                  
REPRESENTATIVE TARR said  BP's [recent oil spill] in  the Gulf of                                                               
Mexico  may   have  limited   the  company's   opportunities  for                                                               
investments  in  North American  and  elsewhere.   Therefore,  it                                                               
would  be helpful  to more  critically examine  the data  used to                                                               
create the graph.                                                                                                               
MR. PULLIAM agreed to provide  as much detailed information as he                                                               
can.  The worldwide and U.S.  figures in the graph are all public                                                               
information, he continued, so there is no confidentiality there.                                                                
2:28:04 PM                                                                                                                    
REPRESENTATIVE SEATON  said he would like  to distinguish Prudhoe                                                               
Bay from  other places on  the North  Slope and around  the world                                                               
because  it  requires  the  agreement of  all  three  owners  for                                                               
investment  to move  forward.   According to  the information  he                                                               
has, only  one other  field in  the world  has the  same criteria                                                               
where  all  participants must  agree  to  the investment  or  the                                                               
project is  vetoed.  He  recalled that two enhanced  oil recovery                                                               
projects in Prudhoe  Bay were proposed and sanctioned  by BP, but                                                               
were vetoed by Exxon.  He  maintained there is a broader question                                                               
here if  Alaska is counting on  Prudhoe Bay being most  of that 5                                                               
percent that  needs to  be developed because  there is  a greater                                                               
restriction in that than other  fields.  He requested Mr. Pulliam                                                               
to discuss this further in writing.                                                                                             
MR. PULLIAM answered  that, first, most fields are  operated in a                                                               
manner  where,  at  the  very   least,  there  must  be  majority                                                               
agreement to  move forward on  anything.   Second, this is  not a                                                               
situation  new to  Alaska; it  has been  here so  that aspect  is                                                               
controlled for in  his analysis when looking at  the potential of                                                               
changing from  one level to another.   Third, it is  looking at a                                                               
situation  of changing  the tax  climate and  making things  more                                                               
profitable and  how likely  it is to  see a  favorable investment                                                               
response.  Those metrics have been  looked at to see whether they                                                               
have been  made attractive  here versus  opportunities elsewhere.                                                               
Lastly,  the revenue  requirement  he looked  at has  anticipated                                                               
that this would all  qualify for the GRE, so it  would all be new                                                               
production,  and   then  couching   it  in   terms  of   what  is                                                               
undiscovered.  Prudhoe Bay is  something that has been discovered                                                               
and it would be great to  get some more production there as well,                                                               
and  the economics  - the  proposed changes  - make  that a  high                                                               
probability.   However,  what he  is  showing here  is that  more                                                               
production from  Prudhoe Bay is not  required to get to  the kind                                                               
of volumes that are needed.                                                                                                     
2:31:34 PM                                                                                                                    
CO-CHAIR FEIGE asked where the other  field with the same kind of                                                               
joint operating agreement [as Prudhoe Bay] is located.                                                                          
REPRESENTATIVE SEATON  replied he does  not recall its  name, but                                                               
that it is in Indonesia and  is associated with a large pipeline.                                                               
He said  he was at  a Pedro van Meurs'  tax seminar and  a fellow                                                               
from  Australia was  familiar with  only one  other field  in the                                                               
world that had this same constraint as in Prudhoe Bay.                                                                          
2:32:37 PM                                                                                                                    
REPRESENTATIVE TUCK,  referring to  slide 22, asked  whether U.S.                                                               
spending includes or excludes the Alaska North Slope.                                                                           
MR.  PULLIAM answered  he subtracted  the North  Slope from  U.S.                                                               
spending to get  the figures on the slide.   In further response,                                                               
he clarified  that the published  U.S. figures include  the North                                                               
Slope, but for this slide he subtracted out the North Slope.                                                                    
REPRESENTATIVE TUCK inquired whether  Mr. Pulliam subtracted U.S.                                                               
spending from the worldwide spending.                                                                                           
MR. PULLIAM answered the worldwide spending includes the U.S.                                                                   
2:33:25 PM                                                                                                                    
CO-CHAIR  FEIGE said  that does  not work  and asked  whether the                                                               
worldwide spending depicted on slide 22 includes the U.S.                                                                       
MR. PULLIAM replied the U.S. is part of the world.                                                                              
REPRESENTATIVE  TUCK said  Alaska is  part  of the  U.S. but  was                                                               
excluded from the U.S.                                                                                                          
MR.  PULLIAM responded  he subtracted  Alaska from  all of  these                                                               
2:33:48 PM                                                                                                                    
CO-CHAIR FEIGE said the bar  on the graph for worldwide spending,                                                               
then, would have to be higher than the U.S. bar.                                                                                
MR. PULLIAM clarified the bars on  slide 22 are indexes, so it is                                                               
changes over time  that are being looked at.   To explain how the                                                               
bars are constructed,  he pointed out that spending  in Alaska in                                                               
2003 was  $1 billion,  so the  index value is  100 on  the graph.                                                               
Spending in  Alaska rose to about  $2.4 billion in 2012  so on an                                                               
index basis that is  240; thus it is 240 percent  of the level it                                                               
was  in 2003.   While  Alaska  was at  $1 billion  in 2003,  U.S.                                                               
spending  was probably  $100 billion  and worldwide  spending was                                                               
probably $250  billion.   Thus, this graph  is showing  that U.S.                                                               
spending  overall  has  increased   the  fastest,  and  worldwide                                                               
spending has increased a bit slower  than the U.S., and Alaska is                                                               
slower than either one.                                                                                                         
2:35:20 PM                                                                                                                    
REPRESENTATIVE TUCK asked why the  North Slope is not included in                                                               
the overall average worldwide spending.                                                                                         
MR. PULLIAM  replied that  could be done,  but the  picture would                                                               
not look  any different  because spending in  Alaska is  so small                                                               
relative to  the world.   What  is trying to  be done  is compare                                                               
changes in Alaska to changes  elsewhere.  In doing that, subtract                                                               
Alaska out  and look  at Alaska  versus the  U.S. and  versus the                                                               
rest of the world.                                                                                                              
2:36:16 PM                                                                                                                    
REPRESENTATIVE  TARR  noted  that   some  of  the  earlier  years                                                               
depicted on slide 22 include  years where Alaska's tax system was                                                               
under  the economic  limit  factor (ELF)  under  which there  was                                                               
effectively no tax on some of  the largest producing fields.  She                                                               
surmised if overall behavior is  related to tax rate, then Alaska                                                               
should have seen significant spending under that scenario.                                                                      
MR.  PULLIAM responded  it can  be seen  during that  time period                                                               
that  spending increases  in Alaska  are roughly  consistent with                                                               
spending  increases elsewhere  in the  world.   Spending in  that                                                               
early period  was not held  back by the  tax rate, but  rather by                                                               
the  low oil  prices.   The rate  of increase  everywhere in  the                                                               
world is not the kind of increase  that has been seen in the last                                                               
five years  as compared to  the first  five years of  that [2003-                                                               
2012] time period.                                                                                                              
2:37:26 PM                                                                                                                    
MR. PULLIAM  continued his presentation,  moving to slide  24 and                                                               
again resuming  his discussion  of the  reasonableness test.   He                                                               
said a  group of economists  studied the  impact of tax  rates by                                                               
constructing a model  to try to predict the impact  of changes in                                                               
tax  rates  on drilling,  among  other  things ["State  Taxation,                                                               
Exploration, and Production  in the U.S. Oil  Industry" by Kunce,                                                               
Gerking, Morgan,  and Maddux,  November 26,  2001].   The authors                                                               
looked at  rates in a  number of different states,  constructed a                                                               
model, and then applied their model to Wyoming.                                                                                 
2:38:53 PM                                                                                                                    
REPRESENTATIVE HAWKER  inquired whether  Mr. Pulliam  places high                                                               
or low credibility on the quality of work in this study.                                                                        
MR. PULLIAM replied it is not  a peer-reviewed study.  He said he                                                               
has  looked  at the  study,  but  has not  dug  into  any of  the                                                               
underlying  calculations.     Directionally,  the   results  look                                                               
correct, but he cannot say about  the magnitude of them.  He said                                                               
Professor Gerking  talked to  the Alaska  Senate last  year about                                                               
potential impacts  in Alaska, but  may not have been  familiar at                                                               
that time  with the  Alaska tax system;  Mr. Pulliam  offered his                                                               
belief that  all the analyses  were done  based on the  old gross                                                               
system.  He reserved judgment on  the study, but said the kind of                                                               
impacts talked about, and the  measuring on drilling responses to                                                               
tax rate changes,  do seem reasonable and some of  the results in                                                               
the study  match with the  reasonableness tests he  is presenting                                                               
to the committee.                                                                                                               
2:40:27 PM                                                                                                                    
MR. PULLIAM  returned to his presentation,  saying the economists                                                               
in the aforementioned study went  through a thought experiment by                                                               
looking at Wyoming  to see what would happen if  the tax rate was                                                               
doubled in  that state.   They found  that doubling the  tax rate                                                               
did not have  a huge impact on production, but  Wyoming got a lot                                                               
more production taxes.   They also found that  while the doubling                                                               
did not have a huge impact on  production, it had a big impact on                                                               
drilling  - and,  in Alaska,  drilling is  the driver  of getting                                                               
additional production.   Something  to keep  in mind,  he pointed                                                               
out, is that  doubling the tax rate in Wyoming  is going from 5.3                                                               
percent to  10.6 percent,  about a 3  percentage point  change in                                                               
government take.   Directing  attention to page  22, table  3, of                                                               
the Gerking study he noted that  a doubling of the tax results in                                                               
a  19.4 percent  drop in  drilling.   Moving to  slide 24  of his                                                               
presentation, Mr.  Pulliam said  he decided  to turn  that result                                                               
around and  calculate the percentage  if taxes were  dropped from                                                               
10.6 percent to  5.3 percent and found that it  would be a change                                                               
of  about 23  percent.   Thus,  for each  1 percent  drop in  the                                                               
severance  tax  rate  there  is  about  a  4  percent  change  in                                                               
drilling.  Under  CSSB 21(FIN) am(efd fld), Alaska  is looking at                                                               
about a 10 percent drop in the  effective gross tax.  So, if this                                                               
same kind  of relationship  in drilling  impact holds  in Alaska,                                                               
that would  suggest about a  43 percent  change in drilling.   In                                                               
2012 the Alaska  North Slope had 60 wells  started that produced;                                                               
a 43 percent increase would be  about 26 additional wells a year.                                                               
In the first year of production,  26 wells would produce about 11                                                               
million barrels.  Assuming a 15  percent decline over the life of                                                               
the production, that would be  about 72 million barrels, which is                                                               
a  lot higher  than the  15  million barrels  the committee  just                                                               
looked at.                                                                                                                      
2:43:32 PM                                                                                                                    
MR. PULLIAM allowed  he cannot say whether  the results translate                                                               
from Wyoming to  Alaska, although the authors of  the study think                                                               
the results would  be generally applicable.  To  further test the                                                               
reasonableness  of achieving  breakeven development,  Mr. Pulliam                                                               
said he therefore conducted the same  analysis as he did on slide                                                               
24, but  at half  the predicted  response rate,  which translates                                                               
into 13 new  well starts per year  [slide 25].  Over  the life of                                                               
those wells,  about 36 million  barrels would be  produced, which                                                               
is  more than  double what  Alaska would  need to  break even  on                                                               
2:44:36 PM                                                                                                                    
REPRESENTATIVE SEATON  noted the  Gerking study is  from November                                                               
26, 2001,  when oil  prices were  $14-$20 per  barrel; increasing                                                               
the tax  from 5.3  to 10.6  percent on  the gross  at such  a low                                                               
price would  mean going  bankrupt or  backwards.   He said  he is                                                               
skeptical  on how  doubling a  gross-based tax  at low  prices is                                                               
applicable  to  a  profit-based  tax   at  today's  prices.    He                                                               
continued:   "That  is  why we  are here  is  because people  are                                                               
saying ... we went  to a scenario at $65 a barrel  and now we are                                                               
$100 a barrel, and ... is  the applicability the same. ... Taking                                                               
this assumption  for reasonableness  and saying  that we  were in                                                               
$15 a  barrel oil and we  are doubling the gross  tax rate, which                                                               
you have  to pay  no matter  whether you are  making a  profit or                                                               
not.  I think those outcomes  and those decision points ... could                                                               
be quite different."                                                                                                            
MR. PULLIAM agreed  they could be different and  added that these                                                               
kinds of things are  taken with a grain of salt.   There is not a                                                               
lot of work in  this area, he said, it is  a very difficult thing                                                               
to tease out.   But this is an example of one  that has been done                                                               
and  the kind  of  relationships that  were found.    One of  the                                                               
reasons he ran a sensitivity test  is in case these things do not                                                               
directly translate  over -  perhaps it is  only one-half  or one-                                                               
third that effect [slide 24].   However, it is all still pointing                                                               
to say  that that  breakeven volume is  something that  is doable                                                               
and is not a big stretch, which is the point here.                                                                              
2:47:33 PM                                                                                                                    
CO-CHAIR  SADDLER commented  this is  an interesting  calculation                                                               
and said  he would like to  have more familiarity with  it before                                                               
he gives  it a  lot of credence.   He asked  whether this  is the                                                               
only  test of  reasonableness  and why  this  particular one  was                                                               
presented to the committee.                                                                                                     
MR. PULLIAM responded he looked  to see whether there are studies                                                               
that have looked  at what effect might be gotten  from a tax rate                                                               
change.   There is not  a lot and  this is  the one he  has seen.                                                               
Also, one of the authors talked to the legislature last year.                                                                   
2:48:26 PM                                                                                                                    
CO-CHAIR  SADDLER   said  Representative  Seaton   has  basically                                                               
questioned  the validity  of  the  study because  it  is old  and                                                               
different conditions.   He  inquired whether  there is  a better,                                                               
more reliable, more up-to-date study.                                                                                           
MR. PULLIAM answered he does  not believe there is something more                                                               
reliable  or more  up-to-date, and  he  is not  saying that  this                                                               
study is.  There  is not a formula he can  give the committee, he                                                               
reiterated.   [The  Gerking study]  is one  piece among  several:                                                               
slide 20  looks at  how reasonable  is it  to expect  that Alaska                                                               
might get this  kind of change; slide 11 looks  at the investment                                                               
metrics,  which  would  increase  considerably.   Then  there  is                                                               
looking  at how  much more  production is  needed -  which is  15                                                               
million barrels  a year -  and how that  relates to what  is left                                                               
[to be discovered].   That 15 million is not a  lot, so from that                                                               
standpoint it  would be  reasonable to  assume that  Alaska could                                                               
get it.   Slide 21 looks at how much  additional capital would be                                                               
needed  to get  that 15  million  barrels; that  capital is  $300                                                               
million a  year, a  12.5 percent increase  from 2012.   Achieving                                                               
this increase is not  a stretch as can be seen  on slide 23 which                                                               
looks at  the spending increases  that have happened in  the rest                                                               
of  the  world  under  tax   rates  that  Alaska  would  be  more                                                               
comparable to.  The Gerking  study is another piece that suggests                                                               
such an increase  is not an unreasonable result.   While he would                                                               
not use this study to predict, it is one piece to consider.                                                                     
2:50:25 PM                                                                                                                    
CO-CHAIR  FEIGE understood  Mr. Pulliam  to be  saying he  is not                                                               
really predicting that  this is going to be the  end result; just                                                               
that the possibility exists that it could be done.                                                                              
MR. PULLIAM replied one has to look and balance the evidence.                                                                   
2:50:37 PM                                                                                                                    
CO-CHAIR SADDLER understood  the last three lines of  slide 23 to                                                               
be saying  that if Alaska had  seen the same increase  in capital                                                               
investment as  had the rest of  the world, Alaska would  have had                                                               
$1.6  billion  more  spending which  would  have  encouraged  the                                                               
production of an additional 80 million barrels of oil.                                                                          
MR.  PULLIAM said  $1.6 billion  would  be enough  to develop  an                                                               
additional  80 million  barrels  at  $20 a  barrel.   In  further                                                               
response, he confirmed this would not be per day.                                                                               
CO-CHAIR  SADDLER,  continuing,  understood   it  would  take  15                                                               
million barrels per year for the  state to break even or get back                                                               
what it has given in lower tax rates.                                                                                           
MR. PULLIAM responded correct.   Responding further, he confirmed                                                               
that 65  million barrels is  the additional amount  of production                                                               
[per year]  that Alaska could  have seen if investment  in Alaska                                                               
had been at the same rate as in the rest of the world.                                                                          
2:52:07 PM                                                                                                                    
MR.  PULLIAM, skipping  slide 26,  concluded his  presentation by                                                               
moving  to  slide 27  to  discuss  how  the divisible  income  is                                                               
divided  up between  state  government,  federal government,  and                                                               
producer.   The  divisible income  is the  net value  of the  oil                                                               
after costs,  explained.  Under ACES,  at a West Coast  ANS price                                                               
of $60 ($2012)  per barrel, the state take is  a little more than                                                               
40 percent.   State take  includes taxes, royalties,  ad valorem,                                                               
and income  taxes.   At $120  the state  take is  just shy  of 60                                                               
percent  and at  $140 the  state take  is just  over 60  percent.                                                               
Producer  take  declines  over  this price  range  [to  about  39                                                               
percent at  $60, about 28 percent  at $120, and about  26 percent                                                               
at $140].   Under CSSB  21(FIN) am(efd fld), the  takes basically                                                               
remain flat  across the price spectrum:   state take is  about 43                                                               
percent  at $60,  rising to  about 45  percent at  $140; producer                                                               
take is  in the mid-30  percent range, slightly declining  as the                                                               
state take rises; and federal take is just below 20 percent.                                                                    
2:53:39 PM                                                                                                                    
REPRESENTATIVE  P.  WILSON  observed  that  [under  CSSB  21(FIN)                                                               
am(efd fld)] the take for  each entity basically remains the same                                                               
between a  price of  $60 and  $140 a barrel.   She  asked whether                                                               
this is still the case at prices below $60 and above $140.                                                                      
MR. PULLIAM  answered that at  the top  range it does  not really                                                               
change much from  what is seen on  slide 27.  At  very low prices                                                               
the state  take would go up  - the state would  get regressive at                                                               
lower prices.                                                                                                                   
2:54:21 PM                                                                                                                    
REPRESENTATIVE  SEATON  inquired  what  dollar  amount  is  being                                                               
transferred  from the  state  to the  federal  government at  the                                                               
price of $120 per barrel.                                                                                                       
MR.  PULLIAM replied  he does  not know  the dollar  amounts, but                                                               
under ACES  the federal take is  about 14 percent and  under CSSB
21(FIN) am(efd  fld) it is  just below  20 percent.   The federal                                                               
government gets  its share  from a combination  of the  state and                                                               
the  producers  because what  producers  pay  in state  taxes  is                                                               
deductible against their federal taxes.   The producers will have                                                               
more  profit, which  will be  shared  35 percent  to the  federal                                                               
government and 65 percent to the producer.                                                                                      
2:55:37 PM                                                                                                                    
REPRESENTATIVE TUCK observed the  maximum price depicted on slide                                                               
27  is $140  and noted  that  the Organisation  for Economic  Co-                                                               
operation and  Development (OECD)  forecasts prices  of $170-$220                                                               
in 10  years.  He requested  Mr. Pulliam to prepare  a graph that                                                               
goes up to a price of $250 a barrel.                                                                                            
MR. PULLIAM agreed to do so.                                                                                                    
2:56:17 PM                                                                                                                    
REPRESENTATIVE TARR  returned to  slides 24-25 and  requested Mr.                                                               
Pulliam to  prepare a chart  for government take that  drops from                                                               
60 percent to  50 percent, so the difference can  be seen between                                                               
going from 60 to 55 percent versus  55 to 50 percent in an effort                                                               
to  determine the  "sweet spot"  for getting  this new  amount of                                                               
MR. PULLIAM  replied these relationships  will not  be continuous                                                               
because at some  point government take is going to  "choke it off                                                               
... you are  going to fall off  the cliff" and which  is where he                                                               
thinks Alaska  has been.   So reducing  10 percentage  point from                                                               
that  level  down  may  well   get  a  much  bigger  impact  than                                                               
increasing government take  in a system that goes  from 5 percent                                                               
to 10 percent; that is a  3 percentage point government take at a                                                               
fairly low government  take level.  So, with  that background, he                                                               
would not  be surprised to see  a bigger impact with  the kind of                                                               
change being talked about than  just a proportional change in the                                                               
government take.                                                                                                                
2:58:10 PM                                                                                                                    
REPRESENTATIVE TARR  requested Mr. Pulliam to  do some evaluation                                                               
of that  for the committee,  perhaps looking at  Alaska's current                                                               
government take and evaluating it  by percentage point change and                                                               
then 1 or  2 percent beneath that; something that  would give the                                                               
committee an idea of the bang for the buck in a bracketed way.                                                                  
MR.  PULLIAM  responded  doing   it  quantitatively  would  be  a                                                               
gargantuan task, but said he can provide a qualitative analysis.                                                                
2:59:00 PM                                                                                                                    
CO-CHAIR FEIGE thanked Mr. Pulliam  for presenting the governor's                                                               
point of view.   He recessed the meeting to a  call of the chair,                                                               
saying  the  next presentation  will  be  from the  legislature's                                                               
consultant [Janak Mayer, PFC Energy].                                                                                           
4:40:02 PM                                                                                                                    
CO-CHAIR  FEIGE called  the  House  Resources Standing  Committee                                                               
meeting back to order.   Representatives P. Wilson, Tuck, Hawker,                                                               
Saddler,  and Feige  were  present  at the  call  back to  order.                                                               
Representatives Johnson,  Olson, Seaton, and Tarr  arrived as the                                                               
meeting  was  in  progress.     Representative  Herron  was  also                                                               
4:40:12 PM                                                                                                                    
JANAK MAYER, Manager,  Upstream and Gas, PFC  Energy, stated Econ                                                               
One Research  provided a good  introduction to what  CSSB 21(FIN)                                                               
am(efd fld) would  do.  To frame the issues  and aims overall, he                                                               
said he will start with  the fundamental problems that PFC Energy                                                               
has  identified with  Alaska's Clear  and Equitable  Share (ACES)                                                               
and  where and  how those  issues are  addressed in  CSSB 21(FIN)                                                               
am(efd  fld) [slide  2].   He  said the  largest  issue, and  the                                                               
center of  debate, is the high  government take under ACES.   The                                                               
very  high  degree of  progressivity  under  ACES means  Alaska's                                                               
regime, relatively  speaking, is  uncompetitive compared  to many                                                               
jurisdictions  it  would  be  competing  against  for  investment                                                               
capital, particularly at the current  high price levels.  Another                                                               
issue under ACES is capital  credits and the significant downside                                                               
exposure these  create for the  state in low  price environments,                                                               
for high  cost projects, and  for projects that are  not entirely                                                               
or  not at  all on  state land.   The  capital credits,  plus the                                                               
producer's ability  to buy  down its  tax rate  through spending,                                                               
means  there are  many different  circumstances  under which  the                                                               
state can  find that  on a production  tax basis,  it effectively                                                               
contributes  more in  low price  environments  and for  high-cost                                                               
projects  than  it actually  reaps  through  the production  tax.                                                               
That is particularly the case for  a project that is not entirely                                                               
on state  lands where the royalty  received by the state  is also                                                               
substantially  less, but  the royalty  is still  making the  same                                                               
effective  contribution  through  tax  credits  to  the  cost  of                                                               
development of a project.                                                                                                       
4:43:21 PM                                                                                                                    
MR. MAYER  said all of the  aforementioned points come back  to a                                                               
common one  - the issue  of high  marginal rates.   High marginal                                                               
rates  under  ACES  create  the  buydown  effect,  meaning  if  a                                                               
producer has  a current high level  of tax under ACES  because of                                                               
where it  is on the  progressivity scale,  it can reduce  its tax                                                               
burden by spending  additional capital.  This  benefit accrues to                                                               
an  incumbent  producer  but  not  to  a  new  development.    In                                                               
addition,  it is  not  always clear  that  that benefit  actually                                                               
translates into the  way a company looks at the  economics of its                                                               
projects.   It is  a case  after the fact  once a  producer knows                                                               
exactly what the  oil price was.   In terms of the  way a company                                                               
runs economics  on a project, the  benefit it gets from  rates of                                                               
return and other  things from the buydown effect is  in some ways                                                               
ephemeral - it  is nice to have but a  company cannot always rely                                                               
on it.   But, it  does mean that  a producer gets  very different                                                               
economics  when it  looks on  an incremental  basis and  a stand-                                                               
alone basis  and it is not  always clear which of  those, even to                                                               
an  existing producer,  best  represents  the actual  fundamental                                                               
economics of the project.  Even  if a producer chooses one or the                                                               
other, it is  very different economics between  a new development                                                               
for  a  new  producer  that   has  no  production  versus  a  new                                                               
development on an incremental basis for an existing producer.                                                                   
4:45:11 PM                                                                                                                    
MR.  MAYER emphasized  ACES is  a complex  system because  of the                                                               
many  different  components  and  because of  all  the  different                                                               
capital credits.  But, ultimately,  it is most complex because it                                                               
is  very difficult  to  take  a simple  look  at  the system  and                                                               
understand what it does because what  it does and how it works is                                                               
very  different in  different  price  environments for  different                                                               
types of producer.   More than anything, he opined,  it seems the                                                               
state should be  seeking to create a much more  overall level and                                                               
neutral playing field that treats  everyone the same - that gives                                                               
everyone the same basic economics -  and he will later talk about                                                               
how  CSSB 21(FIN)  am(efd  fld)  achieves that.    The very  high                                                               
marginal  rates  also  mean  that   producers  face  very  little                                                               
incentive  for greater  efficiency in  costs.   If a  producer is                                                               
faced with  an effective marginal tax  rate of 70, 80,  or almost                                                               
90  percent,  the  benefit  it   gets  from  saving  $100,000  is                                                               
ultimately  one-fifth  to one-tenth  of  its  savings and  unless                                                               
there is  significant benefit from making  investments to achieve                                                               
efficiencies, in many  cases it will not be worth  doing so under                                                               
ACES.   Ultimately, these  all add  up to  a complex  system with                                                               
often counter-intuitive effects.                                                                                                
4:46:41 PM                                                                                                                    
MR. MAYER  reviewed how CSSB  21(FIN) am(efd fld) aims  to tackle                                                               
the aforementioned issues.  Most  significantly, he said, through                                                               
eliminating progressivity,  CSSB 21(FIN)  am(efd fld)  creates an                                                               
overall neutral  regime that gives  a steady level  of government                                                               
take across  a very wide range  of prices - essentially  close to                                                               
65 percent  government take at prices  as low as $70  a barrel to                                                               
over $160.   The bill limits the downside risk  to the state from                                                               
the capital credit  by eliminating the capital  credit.  However,                                                               
it does not eliminate the  downside risk because it maintains the                                                               
net  operating loss  (NOL) credit,  which is  at the  rate of  35                                                               
percent  rather than  [the current]  25  percent to  go with  the                                                               
higher 35  percent base rate.   That seems a  manageable downside                                                               
risk,  he said,  because it  is 35  percent effective  government                                                               
support for  spending versus the 45-90  percent effective support                                                               
for spending  under ACES  depending on  whether one  is a  new or                                                               
incumbent producer.                                                                                                             
4:48:07 PM                                                                                                                    
MR.  MAYER  addressed  the  question  that  came  up  during  Mr.                                                               
Pulliam's testimony about the possibility  of negative taxes from                                                               
the  gross revenue  exclusion (GRE)  in a  low price  environment                                                               
under CSSB  21(FIN) am(efd fld).   He confirmed that that  is the                                                               
case, saying it would be a  remaining exposure to the state under                                                               
the  Senate bill.    However, he  continued,  that exposure  also                                                               
exists under ACES;  the difference under CSSB  21(FIN am(efd fld)                                                               
is  that most  of  the  downside risk  is  controlled because  of                                                               
eliminating the  capital credit.   It remains an  issue primarily                                                               
with projects that are eligible for  the GRE - so, by definition,                                                               
no existing  production and  only a  small portion  of production                                                               
over  the coming  years  as  new projects  come  on  line.   Most                                                               
importantly, CSSB  21(FIN) am(efd fld) achieves  a balance within                                                               
the  system  through completely  even  impacts  for an  incumbent                                                               
versus a new producer.  It  suddenly becomes very clear to assess                                                               
how the system  works, what it means for any  number of different                                                               
producers because its impacts are  equivalent across the spectrum                                                               
and across a wide range of prices.                                                                                              
MR. MAYER  further said that  a neutral regime also  creates just                                                               
one low,  constant marginal  rate.  The  marginal tax  rate under                                                               
CSSB 21(FIN) am(efd  fld) is the 35 percent that  is specified in                                                               
the  base rate,  creating a  very strong  incentive for  producer                                                               
efficiency in  cost control  of investments  that can  bring down                                                               
costs and  increase efficiencies.   A balanced regime for  both a                                                               
large and small  producer, along with elimination  of the capital                                                               
credit, allows  for the  2016 sunset of  both the  small producer                                                               
tax credit and  the exploration credit under  CSSB 21(FIN) am(efd                                                               
fld).   The state  is still  able to  achieve its  intention that                                                               
small producers  are not  disadvantaged, while  getting rid  of a                                                               
number  of the  perverse and  counter-intuitive aspects  of ACES.                                                               
Particularly once those  things have been sunset,  the state will                                                               
have an overall much cleaner and much simpler fiscal system.                                                                    
4:50:57 PM                                                                                                                    
REPRESENTATIVE SEATON  said he is  trying to figure out  the idea                                                               
that the balanced  system is this goal the state  has.  The state                                                               
was  trying  to  incentivize  production  from  new  participants                                                               
through its  tax regime, he  continued.  They  responded actively                                                               
and  the  state  has  lots of  new  participants,  leases,  units                                                               
applied for, and  exploration drilling taking place.   The higher                                                               
marginal  amount for  the  producers did  not  stimulate them  to                                                               
invest in  the legacy fields.   It sounds  like it is  being said                                                               
that  a legacy  owner cannot  analyze  what it  is with  existing                                                               
production.    They  know  they have  a  higher  buydown,  higher                                                               
marginal rate,  and that  they get  a lot  more investment  on an                                                               
individual expenditure from  the state, yet they  have chosen not                                                               
to accelerate  their capital spend  and increase  production like                                                               
the  smaller participants  have.   While  both  systems would  be                                                               
analyzed as being the same  [under CSSB 21(FIN) am(efd fld)], the                                                               
state would  have less incentive  for the producers  because they                                                               
will get  less support  at high  prices and  there will  be fewer                                                               
credits available for  the new producers.  He asked  how this new                                                               
balance achieves the goal of stimulating the investment.                                                                        
4:53:28 PM                                                                                                                    
MR. MAYER  replied he does not  concur that ACES has  been a boon                                                               
for small producers and has  attracted an enormous number of them                                                               
to the state.   Looking at who is actually  in Alaska and active,                                                               
Nikaitchuq  and Oooguruk  are the  best  examples of  significant                                                               
projects that  have come on line  in recent years, and  they were                                                               
discoveries  that  occurred and  were  put  into sanction  before                                                               
ACES.   Ultimately, he continued,  ACES had a  detrimental impact                                                               
on the economics  of those projects.  A number  of explorers have                                                               
come to Alaska  and potentially made promising finds  but said it                                                               
would require  a better tax  regime.  So,  in his opinion,  it is                                                               
not  quite clear  that  somehow ACES  has been  a  boon to  small                                                               
producers in that sense.  It certainly  is a boon if a company is                                                               
just an  explorer just  looking to  prove up  a prospect  with no                                                               
intention  of taking  that into  production  because it  provides                                                               
that  explorer  with  a  high level  of  government  support  for                                                               
exploration  costs.   Beyond that,  it is  hard to  see how  ACES                                                               
helps, whether a small or large producer.                                                                                       
4:55:06 PM                                                                                                                    
MR.  MAYER,   continuing  his  response,  said   his  comment  on                                                               
incremental economics  was not that  people are unable  to figure                                                               
out  what  the  benefit  is.   Rather,  producers  assessing  the                                                               
economics of projects  look at them in a wide  number of ways and                                                               
a  project needs  to make  sense  on a  stand-alone basis  before                                                               
looking  at  the  question  of   after-tax  benefits.    A  large                                                               
developer producing a  large project is not  developing a project                                                               
in order  to purchase tax  equity for itself.   It is  looking to                                                               
make a substantial investment in  a long-term asset that produces                                                               
significant cash  flow over the  very long  term in a  very, very                                                               
wide range of price environments.   Being able to look at a chart                                                               
and seeing  that, in  theory, a magical  internal rate  of return                                                               
(IRR) can be had if the producer  can get an oil price of exactly                                                               
$120 over the  next 20 years, does not help  that producer in the                                                               
real world  of actually  assessing project  economics.   It seems                                                               
ACES is a system engineered  to achieve certain magic goals, like                                                               
a higher IRR  at $120 if an existing producer  is looking just at                                                               
that one price level at incremental  economics.  It is the system                                                               
that one creates  when trying to pull as many  levers as possible                                                               
to hit particular targets, rather  than a system that one creates                                                               
if saying  that what is  wanted is an overall,  simple, balanced,                                                               
competitive regime that lets the  private sector make the crucial                                                               
decisions  about allocation  of  capital and  prices  at a  level                                                               
playing field and then let the private sector play.                                                                             
4:57:16 PM                                                                                                                    
MR. MAYER commenced his presentation,  discussing the key changes                                                               
that CSSB 21(FIN)  am(efd fld) would make to  the state's current                                                               
tax  system under  ACES [slide  3].   The current  base tax  rate                                                               
would be increased to 35  percent, explained.  Progressivity as a                                                               
separate construct  under ACES would be  eliminated; however, the                                                               
$5 per barrel  allowance under CSSB 21(FIN) am(efd  fld) would be                                                               
an implicit  progressivity that is progressivity  just sufficient                                                               
to counteract  the regressive nature  of the royalty  and provide                                                               
an overall  balanced, steady, neutral  level of  government take.                                                               
The maximum  tax rate of 75  percent under ACES would  be reduced                                                               
to a  maximum 35 percent, also  known as the base  rate under the                                                               
Senate  bill.    Further,  CSSB   21(FIN)  am(efd  fld)  provides                                                               
incentives  for  new  production.   [A  gross  revenue  exclusion                                                               
(GRE)]  would  apply  to  new   producing  areas,  expansions  to                                                               
existing producing areas, or areas  in legacy fields that are not                                                               
currently  contributing  to  production that  the  Department  of                                                               
Natural Resources (DNR)  has certified as such.   The Senate bill                                                               
eliminates  the current  capital  credits and  the net  operating                                                               
loss  (NOL) credit  would  be  increased from  25  percent to  35                                                               
percent to match the Senate  bill's base rate.  Additionally, the                                                               
NOL  credit would  be monetized  over  one year  rather than  two                                                               
years.  Also,  CSSB 21(FIN) am(efd fld) would  sunset the current                                                               
small producer credit and the exploration credit in 2016.                                                                       
4:59:21 PM                                                                                                                    
MR.  MAYER compared  government take  at base  production between                                                               
ACES and  CSSB 21(FIN)  am(efd fld)  [slide 4].   He  pointed out                                                               
ACES is a steeply progressive  tax system that rises particularly                                                               
steeply from a  West Coast Alaska North Slope (ANS)  price of $70                                                               
a barrel  to $120-$125.   The $120-$125 reflection  point roughly                                                               
matches with  $92.50 a  barrel in production  tax value.   Beyond                                                               
$125, the  progressivity levels out  somewhat but  still steadily                                                               
increases until going  above 75 percent government  take at $150,                                                               
ultimately  reaching  over  80 percent  government  take  at  the                                                               
highest  price  levels  for  existing  production.    Under  CSSB
21(FIN) am(efd  fld), progressivity is replaced  with essentially                                                               
a nearly  flat 65 percent  government take, coming down  to about                                                               
64 percent at the lowest price levels.                                                                                          
5:00:31 PM                                                                                                                    
REPRESENTATIVE TUCK  inquired what the  value is to the  State of                                                               
Alaska for each percentage point.                                                                                               
MR. MAYER replied he will need  to check, but his guess is around                                                               
$100 million.                                                                                                                   
CO-CHAIR FEIGE asked at what price.                                                                                             
MR. MAYER responded at the current oil prices of $100-$110.                                                                     
5:01:10 PM                                                                                                                    
MR. MAYER turned  to discussion of the new  production that would                                                               
be eligible  for the gross  revenue exclusion under  CSSB 21(FIN)                                                               
am(efd fld) [slide 5].  Under  ACES, rates of government take are                                                               
actually higher for new developments  on a stand-alone basis than                                                               
for base  production or  a new project  on an  incremental basis,                                                               
rising to  rates substantially  above 75  percent at  upper price                                                               
levels.   However, the Senate  bill seeks to  further incentivize                                                               
new  development by  applying the  GRE,  essentially getting  the                                                               
government take down  to 60-61 percent across a  very broad range                                                               
of prices.                                                                                                                      
5:02:11 PM                                                                                                                    
CO-CHAIR SADDLER requested a definition of stand-alone project.                                                                 
MR.  MAYER  answered stand-alone  means  looking  just at  a  new                                                               
project by  itself with nothing else.   It can be  viewed as what                                                               
that project  looks like  for a completely  new producer  with no                                                               
existing production, or simply as  an exercise in looking at that                                                               
project by  itself and  assessing its  economic value  by itself.                                                               
In further response, he  explained stand-alone versus incremental                                                               
means rather than  looking just at that one  project, an existing                                                               
producer would add  that project onto the producer's  view of the                                                               
base portfolio  and run it  through a  model.  Then  the producer                                                               
would take just  the base portfolio and run it  through the model                                                               
and subtract the  difference between the two.  He  pointed out it                                                               
is  under incremental  economics that  some of  the effects  come                                                               
into  play  of  counter-intuitively  high   rates  of  return  at                                                               
particular oil prices  or very high levels  of government support                                                               
for spending under ACES.                                                                                                        
5:03:53 PM                                                                                                                    
MR. MAYER, in response to  Co-Chair Feige, confirmed that the $18                                                               
per barrel development on slide 5 is the capital expenditure.                                                                   
5:04:09 PM                                                                                                                    
MR. MAYER,  in response to Representative  Seaton, confirmed that                                                               
stand-alone  is as  if  Alaska had  a tax  system  that was  ring                                                               
fenced.  Under  CSSB 21(FIN) am(efd fld), the result  is the same                                                               
whether  or not  it is  looked  at on  a stand-alone/ring  fenced                                                               
basis because  the economics  look the  same either  way.   It is                                                               
only for ACES that there is a significant difference.                                                                           
5:04:38 PM                                                                                                                    
REPRESENTATIVE TARR  observed Mr.  Mayer used  $18 per  barrel in                                                               
development cost  [slide 5] while Econ  One used $20.   She asked                                                               
whether this is enough for the development costs of heavy oil.                                                                  
MR. MAYER replied  it depends entirely on the grade  of heavy oil                                                               
as  there can  be viscous  and  heavy or  heavy and  ultra-heavy.                                                               
"For the  most expensive of  those, possibly  not," he said.   On                                                               
the other hand, he said he  thinks the most expensive of those is                                                               
unlikely  to  be  economic  at  current  technology  and  current                                                               
prices.   If this was run  at $20 or  $25 per barrel in  terms of                                                               
overall  levels  of  government   take,  the  result  would  look                                                               
basically the same  because it looks the same across  a very wide                                                               
range of development cost for a new project.                                                                                    
5:05:31 PM                                                                                                                    
REPRESENTATIVE SEATON understood Mr. Mayer  to be saying that the                                                               
interaction between different fields, such  as heavy oil or shale                                                               
oil development, would  be no different on the  economics if ring                                                               
fencing was used than under CSSB 21(FIN) am(efd fld).                                                                           
MR. MAYER  responded that  is certainly  true under  CSSB 21(FIN)                                                               
am(efd fld) and  he does not think  one would want to  do that in                                                               
the interest  of maintaining  the overall  simplicity of  the tax                                                               
regime.   Seeking to incentivize particular  types of development                                                               
can  be done  in other  ways, the  gross revenue  exclusion (GRE)                                                               
being an example.  Under CSSB  21(FIN) am(efd fld), a ring fenced                                                               
project making  a loss  would be eligible  for the  net operating                                                               
loss credit, which  at 35 percent is the same  benefit as writing                                                               
down that loss against the  producer's current tax liability; so,                                                               
the two  things are identical under  the Senate bill.   But, they                                                               
are not identical under ACES  because of the difference between a                                                               
25  percent  net operating  loss  credit  versus, perhaps,  being                                                               
taxed at 40 percent under ACES.                                                                                                 
5:06:51 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired whether Mr. Mayer  is saying that                                                               
under CSSB 21(FIN) am(efd fld)  the major producers can apply net                                                               
operating losses to all developments when prices are down.                                                                      
MR.  MAYER answered  it  is  not his  intention  to suggest,  but                                                               
simply  to  say that,  in  terms  of the  fundamental  economics,                                                               
looking at  a project  on a stand-alone  basis or  an incremental                                                               
basis is the same thing under  CSSB 21(FIN) am(efd fld), which is                                                               
not so under ACES.                                                                                                              
5:07:35 PM                                                                                                                    
MR. MAYER  resumed his presentation, discussing  how CSSB 21(FIN)                                                               
am(efd  fld)  compares in  competitiveness  of  fiscal regime  to                                                               
regimes similar to Alaska [slide 6].   For example, taking out of                                                               
the picture  countries like Ireland  and New Zealand,  which have                                                               
very low government take but  very little oil and gas production,                                                               
and  countries like  Kazakhstan, which  have enormous  oil fields                                                               
that can  sustain a  much higher  level of  government take.   He                                                               
explained slide 6 looks at  regimes comparable to Alaska across a                                                               
range of  different prices; each  cluster of  [different colored]                                                               
bars on the  graph represents four different prices -  red is $80                                                               
per barrel,  yellow is  $100, blue  is $120,  and green  is $140.                                                               
The left  red arrow at the  top of the graph  represents ACES for                                                               
base production and  the right red arrow represents  ACES for new                                                               
development at  $18 per  barrel.   The height  difference between                                                               
the four bars  indicates the very steep  progressivity under ACES                                                               
- government take under ACES rises  from 65 percent to 75 percent                                                               
across that  range of prices.   The effect of  that progressivity                                                               
is  to  overall  put  Alaska's  regime at  the  upper  end  among                                                               
countries with which  Alaska might seek to compare itself.   At a                                                               
new development cost  of $18 and prices of $100-$140,  ACES is as                                                               
bad, if not worse, than  Norway, which has the highest government                                                               
take within countries belonging  to the Organisation for Economic                                                               
Co-operation and Development (OECD).                                                                                            
5:09:51 PM                                                                                                                    
CO-CHAIR SADDLER asked  whether slide 6 includes  a world average                                                               
or mean for the regions against which Alaska is compared.                                                                       
MR.  MAYER  replied he  has  not  calculated  the mean  for  this                                                               
particular  data set,  so  will  get back  with  an  answer.   In                                                               
further  response,  he  said regimes  comparable  to  Alaska  are                                                               
around  the  60 percent  level;  for  pure tax  royalty  regimes,                                                               
probably  a   little  below  that;  and   for  production-sharing                                                               
contracts about [60 percent].                                                                                                   
5:10:49 PM                                                                                                                    
REPRESENTATIVE TARR observed the regimes  on the left side of the                                                               
chart on  slide 6 appear  to have  somewhat of a  regressive tax,                                                               
and on the right  side of the chart a more  progressive tax.  She                                                               
requested Mr. Mayer to talk about the trends.                                                                                   
MR. MAYER responded  many of the regimes on the  left side of the                                                               
chart, including  Canada and the  U.S. Lower 48, are  tax royalty                                                               
regimes in which  the royalties are the  most significant portion                                                               
and royalties  are inherently regressive.   Those  appearing most                                                               
regressive are usually because they  have a relatively high level                                                               
of government take and may also have a high level of costs.                                                                     
REPRESENTATIVE  TARR inquired  whether  a chart  is available  in                                                               
similar format to slide 6 that compares the profits per barrel.                                                                 
MR. MAYER  answered he  does not  have that as  such, but  at any                                                               
given  price level  the government  take is  calculated by  first                                                               
determining the  divisible income.   Divisible income is  all the                                                               
revenues less the costs that are  netted out.  Government take is                                                               
the measure of  how much of the divisible income  is going to the                                                               
government;  by corollary,  the remaining  portion is  the amount                                                               
going to the  company.  So, it  is a percentage of  each of those                                                               
barrels at each of those prices.                                                                                                
5:12:59 PM                                                                                                                    
MR. MAYER,  in response  to Co-Chair Feige,  said [the  column on                                                               
slide 6 labeled Canada - Alberta OS] is Alberta oil sands.                                                                      
CO-CHAIR  FEIGE commented  that production  from the  Alberta oil                                                               
sands only sells for $55 per barrel.                                                                                            
5:13:23 PM                                                                                                                    
REPRESENTATIVE  TARR understood  the chart  on slide  6 does  not                                                               
reflect  the ability  in  the  U.S. to  buy  state taxes  towards                                                               
federal taxes in terms of overall government take.                                                                              
MR. MAYER, qualifying  he is unsure he  understands the question,                                                               
replied the  chart includes all  of the components of  the fiscal                                                               
regime combined.                                                                                                                
REPRESENTATIVE  TARR presumed,  then, that  for Alaska  the total                                                               
government  take should  be a  little bit  lower once  a taxpayer                                                               
applies its state taxes towards its federal taxes.                                                                              
MR. MAYER responded that, like  Econ One, he assumed an effective                                                               
state tax  rate of 6  or 6.5 percent  in Alaska, rather  than the                                                               
nominal 9.4 percent.                                                                                                            
5:14:07 PM                                                                                                                    
REPRESENTATIVE SEATON  noted the same producers  are operating in                                                               
Alaska  as  are in  the  Alberta  oil  sands.   He  related  that                                                               
analysts attending  a ConocoPhillips  meeting in  February [2013]                                                               
released  a statement  saying companies  are  planning to  reduce                                                               
their assets in  the Canadian oil sands.  He  therefore asked why                                                               
it is being  said here that it  is a tax regime that  is going to                                                               
drive this differential.                                                                                                        
MR.  MAYER  answered  many  different  factors  drive  investment                                                               
decisions:   fundamental economics  of the asset  itself combined                                                               
with  oil prices  and the  tax environment  all come  together in                                                               
those questions.   He said he cannot address  in his presentation                                                               
a  particular  quote  from ConocoPhillips  that  is  specifically                                                               
about  the oil  sands.    However, when  looking  at the  overall                                                               
levels of investments  being made by ConocoPhillips  in the Lower                                                               
48 as  a whole, and  the rate of  growth of those  investments in                                                               
the Lower  48 as a whole,  there is no question  that the company                                                               
sees a dramatically  more economic opportunity for  itself in the                                                               
Lower 48 than it does in Alaska.                                                                                                
5:16:02 PM                                                                                                                    
CO-CHAIR FEIGE surmised  a producer receiving $55  per barrel for                                                               
Alberta heavy  crude is probably not  making as much money  as it                                                               
would in a place where the  price is $95-$100, no matter what the                                                               
government percentage is.                                                                                                       
REPRESENTATIVE  SEATON said  that is  the point.   Producers  are                                                               
leaving  some  of these  low-tax  regimes  because of  the  other                                                               
economic   factors,  but   it  is   being  considering   in  this                                                               
presentation  that   basically  the   tax  regime  is   the  only                                                               
characteristic that is  changing the economic decisions.   It may                                                               
well be  found that this  change in tax  regime does not  do what                                                               
was thought because there are other considerations.                                                                             
CO-CHAIR FEIGE responded "possibly,"  but said government take is                                                               
the  major expense;  of the  total price  received for  a barrel,                                                               
government take is the largest of the components.                                                                               
5:17:15 PM                                                                                                                    
MR. MAYER  concurred with Co-Chair  Feige, saying that  is likely                                                               
in general.  Addressing Representative  Seaton, he said he is not                                                               
suggesting that government  take is the only metric  looked at or                                                               
is the only  thing affecting the desirability  of any investment.                                                               
The attractiveness of an investment is  due to a number of things                                                               
and the  economics of a  project are due  to a number  of things,                                                               
including the cost structure of  the project, the price received,                                                               
and the interaction of those  things with the fiscal environment.                                                               
Taking the  Alberta oil sands out  of the picture and  looking at                                                               
the rest of  the fiscal regimes on  slide 6, it can  be seen that                                                               
these are  mostly fiscal  regimes at a  lower government  take as                                                               
well  as environments  that have  substantially lower  costs than                                                               
Alaska.    Unfortunately,  both of  these  things  work  against,                                                               
rather  than toward,  Alaska's competitiveness.   PFC  Energy has                                                               
produced a wide  range of analyses looking at  what the different                                                               
regimes  achieve, and  has always  tried to  look at  net present                                                               
value per barrel  and rate of return of different  projects.  PFC                                                               
Energy  frequently  comes  back  to slides  like  these  because,                                                               
overall,  government  take  is a  measure  that  is  particularly                                                               
useful  and particularly  easy to  understand what  is happening,                                                               
but it  should definitely not  be seen as the  only one.   In all                                                               
those cases, though,  what is seen is that the  economic value of                                                               
projects under  ACES is not  competitive compared to some  of the                                                               
other alternative uses  of capital, and CSSB  21(FIN) am(efd fld)                                                               
goes a long way in rectifying that problem.                                                                                     
5:19:35 PM                                                                                                                    
REPRESENTATIVE TUCK, given  that there are so  many other factors                                                               
besides taxes in a fiscal  regime, requested a comparison be done                                                               
between Alaska North  Slope, the rest of the U.S.,  and the world                                                               
that   looks  at   an  investment   comparison  along   with  tax                                                               
competitiveness so a direct relationship  can be seen between the                                                               
MR. MAYER  answered he can look  at doing that and  said Econ One                                                               
earlier had a useful slide in  terms of looking at the trajectory                                                               
of investment.                                                                                                                  
REPRESENTATIVE TUCK  concurred, but said  not as specific  to the                                                               
different prices per barrel as shown on slide 6.                                                                                
5:20:29 PM                                                                                                                    
REPRESENTATIVE  TARR  noted Alaska  has  a  system based  on  net                                                               
profit rather than  the gross.  She asked  which regimes depicted                                                               
on slide 6 are gross and which are net profit.                                                                                  
MR. MAYER  replied Louisiana, United  Kingdom, and  Australia are                                                               
net profit-based  systems similar  to Alaska,  but purer  in that                                                               
they only tax profits while Alaska  is a hybrid of both gross and                                                               
net.  The  rest of the depicted regimes  are gross, royalty-based                                                               
REPRESENTATIVE TARR  commented it would  seem logical that  a net                                                               
profits system  would create a  more competitive regime  to start                                                               
with because  a producer would  know it  is not liable  for taxes                                                               
until it has made money.                                                                                                        
MR. MAYER  said he will  address this when  he moves to  his next                                                               
two slides.                                                                                                                     
5:22:01 PM                                                                                                                    
CO-CHAIR SADDLER,  for purposes of  slide 6, inquired  whether it                                                               
matters  if the  regime is  net based  or gross  based, given  it                                                               
measures government take, not how it was gotten there.                                                                          
MR. MAYER  responded correct, they  can all be compared  in terms                                                               
of government take.   The regimes that are regressive  tend to be                                                               
gross  systems, but  they can  all  be compared  ultimately.   In                                                               
further  response,  he confirmed  slide  6  is therefore  a  fair                                                               
measure.  He  added that royalties in the Lower  48 accrue to the                                                               
private landowner rather than technically  to government; in most                                                               
cases, all  those things are  counted as government take  for the                                                               
reason of being able to compare like to like.                                                                                   
5:22:50 PM                                                                                                                    
MR. MAYER,  returning to his  presentation, said the  question of                                                               
relative  attractiveness  of  net  versus gross  feeds  into  the                                                               
question of  regressive and  progressive regimes  [slide 7].   In                                                               
general, there are  two possible reasons to  desire a progressive                                                               
element  in  Alaska's  fiscal  regime.   One  is  to  "counteract                                                               
regressive elements in  the regime to achieve  something close to                                                               
neutrality."  The other is to do  what ACES does, which is "to go                                                               
beyond neutrality  to assure  a higher  level of  government take                                                               
for the  state in  high price environments."   In  thinking about                                                               
why do  one or  the other,  it is important  to think  about what                                                               
regressive  and  progressive  regimes  imply  in  terms  of  very                                                               
different outlooks on risk and  reward for government and for the                                                               
private  sector.    Regressive   regimes  have  many  flaws,  but                                                               
essentially they limit  risk to the state because they  put a lot                                                               
of downside  risk on the  private sector, thereby  protecting the                                                               
state in  low price or  high cost  environments.  In  return they                                                               
provide outsized  benefits to corporations  in high price  or low                                                               
cost environments.   Progressive  regimes, by and  large, involve                                                               
the  contrary:   the state  bears more  price and  more costs  in                                                               
return for taking  less when there is less to  go around and more                                                               
when times are fat.                                                                                                             
MR.  MAYER, regarding  Representative Tarr's  question about  the                                                               
attractiveness  of net  profit  regimes, said  Norway  is a  good                                                               
example in that it  is a pure net profit-based tax  that is at an                                                               
overall  high level  and quite  progressive.   But  Norway has  a                                                               
number of ways  to keep investment going that  do not necessarily                                                               
apply to  Alaska, such as  a state-owned  oil company and  also a                                                               
government vehicle  that can invest  directly in the  oil sector.                                                               
Norway is  also a regime  that while having high  government take                                                               
at the  high end,  also has  substantially lower  government take                                                               
when prices  fall off,  so it  has no  regressive element  in its                                                               
regime.    Unusual about  Alaska  is  that  it combines  a  fixed                                                               
royalty with a  very progressive net profit-based tax.   So, from                                                               
an investor perspective, Alaska's  fiscal system arguably has the                                                               
worst of  both worlds because the  investor still has all  of the                                                               
downside risk that comes with a  royalty system.  Under ACES, the                                                               
royalty alone  can result in  100 percent government take  at $60                                                               
per barrel,  which is coupled  with high government take  in high                                                               
price environments.  So, rather  than being a system that chooses                                                               
one  or the  other, ACES  does  both because  it is  a hybrid  of                                                               
royalty regime and profit-based tax.                                                                                            
5:26:32 PM                                                                                                                    
REPRESENTATIVE TUCK  surmised, then,  some sort  of progressivity                                                               
is beneficial.                                                                                                                  
MR. MAYER, to  provide an answer, drew attention to  the chart on                                                               
slide  8  which  demonstrates  regressivity,  progressivity,  and                                                               
neutrality  in regard  to  ACES, CSSB  21(FIN)  am(efd fld),  and                                                               
royalty only.  He said royalty  by itself has a regressive impact                                                               
because it is  a fixed percentage of a barrel  - royalty takes an                                                               
ever greater  proportion of  the available cash  net of  costs as                                                               
prices go down.   Effectively, if the price went  down to $40 per                                                               
barrel,  the royalty  would reach  100  percent government  take.                                                               
While  CSSB  21(FIN)  am(efd  fld)  does  not  specifically  have                                                               
progressivity  as a  separate element,  the  intersection of  the                                                               
higher  rate  with  the  $5  per  barrel  allowance/credit  gives                                                               
something that is effectively equivalent  to an implicit and mild                                                               
progressivity.  The counterbalance  is that regressive element of                                                               
the  royalty, giving  an overall  flat  neutral government  take.                                                               
Some  mildly  progressive element  like  that  is needed  in  the                                                               
system to achieve neutrality.                                                                                                   
5:28:09 PM                                                                                                                    
MR.  MAYER, responding  to Representative  Seaton, confirmed  the                                                               
blue line on slide 8 delineates  the 12.5 percent royalty rate on                                                               
legacy fields and  that the royalty at a price  of $60 per barrel                                                               
is 60  percent and at $100  it is 50 percent.   Drawing attention                                                               
to  slide  11, which  depicts  how  the different  components  of                                                               
government take  stack together, he  clarified that when  he says                                                               
"royalty  only"  he  is  meaning royalty  along  with  state  and                                                               
federal  income tax,  but no  production tax.   Thus,  royalty by                                                               
itself is  not 50  percent government  take, rather  royalty with                                                               
the  other  standard  components  of the  system  is  50  percent                                                               
government take.                                                                                                                
5:29:23 PM                                                                                                                    
MR.  MAYER, in  response to  Representative Tuck,  confirmed that                                                               
the blue  line on slide 8  is the royalty plus  state and federal                                                               
income  tax, but  no production  tax.   In  further response,  he                                                               
confirmed  the red  and yellow  lines  depicting government  take                                                               
percentages for ACES and for  CSSB 21(FIN) am(efd fld) do include                                                               
5:29:46 PM                                                                                                                    
MR.  MAYER, responding  to Representative  Seaton, confirmed  the                                                               
line depicting royalty percentages also includes property tax.                                                                  
5:30:12 PM                                                                                                                    
REPRESENTATIVE  TARR  returned  attention to  slide  7  regarding                                                               
regressive  versus  progressive  regimes.    She  understood  the                                                               
argument here  as being that under  ACES the state takes  on some                                                               
of the  downside risk and  the benefit is  on the high  side, and                                                               
flipping that.   She inquired  whether, in transitioning  to CSSB
21(FIN) am(efd fld),  oil companies will need to  use a different                                                               
discount route for planning projects on the North Slope.                                                                        
MR. MAYER replied  the discount rate used by oil  companies is an                                                               
internal matter that  reflects possibly, in part, the  risks of a                                                               
project,  but  mostly  it  is  a  corporate  standard  to  enable                                                               
different projects  to be compared  against each other.   He said                                                               
he does not  think the discount rate used would  be affected; or,                                                               
if it  did, that it would  make a material impact.   The benefits                                                               
of different projects are compared  against each other by using a                                                               
common standard.  So, regardless  of what the common standard is,                                                               
it does not change the result.                                                                                                  
5:31:36 PM                                                                                                                    
MR. MAYER concluded his discussion  of slide 8, stating the point                                                               
is that royalty  is a regressive element.  To  achieve an overall                                                               
neutral  or   very  mildly  progressive  regime,   some  sort  of                                                               
progressive element  would still  need to be  included.   In that                                                               
sense, the difference  between CSSB 21(FIN) am(efd  fld) and ACES                                                               
is  in the  degree of  that progressivity  as well  as how  it is                                                               
achieved.   The Senate bill  contains an  essentially progressive                                                               
element that is just progressive  enough to counteract the effect                                                               
of the  royalty and  achieve overall  neutrality rather  than the                                                               
jacking up of government take at higher prices.                                                                                 
5:32:27 PM                                                                                                                    
REPRESENTATIVE  TARR  asked  whether   Mr.  Mayer  has  done  any                                                               
evaluation to see  if some small level of  progressivity could be                                                               
maintained across higher prices.                                                                                                
MR. MAYER  responded there  are a number  of different  ways that                                                               
could  be achieved  should that  be the  direction the  committee                                                               
wants to  go in.   For example,  explicit progressivity  could be                                                               
included,  which   he  would  recommend  against,   or  the  same                                                               
mechanism  included in  the current  Senate bill  could be  used,                                                               
which  is  a   combination  of  a  higher  base   rate  with  the                                                               
progressive element of  the dollar per barrel  exclusion to bring                                                               
it down at lower prices.                                                                                                        
REPRESENTATIVE TARR said she is  interested in requesting how the                                                               
$5  per  barrel  credit  in  the current  Senate  bill  could  be                                                               
modified to have  a much more gradual incline than  does ACES, so                                                               
that  rather  than a  neutral  position  it  is a  just  slightly                                                               
progressive take over higher prices.                                                                                            
CO-CHAIR FEIGE  stated that  is something  Mr. Mayer  has already                                                               
been asked to do.                                                                                                               
5:34:50 PM                                                                                                                    
MR. MAYER resumed his presentation,  explaining the $5 production                                                               
allowance is like reverse progressivity  to counteract the effect                                                               
of royalty [slide 9].  He  posed a scenario of 50 million barrels                                                               
of production.  At a price  of $60 per barrel, the production tax                                                               
value (PTV) totals $1 billion, for  a PTV per barrel of $20 under                                                               
the terms  of a  profit-based tax.   At the flat  tax rate  of 35                                                               
percent,  the production  tax prior  to factoring  in the  $5 per                                                               
barrel  allowance  would  be  $350  [million].    The  production                                                               
allowance of  $5 would  deduct $250  [million], for  a production                                                               
tax liability  of $100 million,  or 10  percent of the  total PTV                                                               
rather than 35 percent.   So, at this low oil  price, the rate is                                                               
substantially below  the notional 35  percent base rate.   As oil                                                               
prices  increase,  the  tax rate  after  the  allowance  steadily                                                               
rises, reaching  a rate of  30 percent  after the allowance  at a                                                               
price of  $140.  The  rate asymptotically approaches  35 percent,                                                               
never quite reaching 35 percent  as prices get higher and higher.                                                               
The  35 percent  is therefore  better understood  as the  maximum                                                               
rate under the tax  rather than as the base rate.   The effect of                                                               
the $5  production allowance is, in  some ways, like a  mild form                                                               
of progressivity.   It is reverse in that rather  than going from                                                               
a fixed  base and building  up, it  is instead decreasing  from a                                                               
fixed top level.                                                                                                                
5:37:51 PM                                                                                                                    
MR.  MAYER,  in  response  to  Representative  Seaton,  said  the                                                               
progressive tax rate  deduction shown on the bottom  of the chart                                                               
on slide  9 is  the difference  between the  35 percent  tax rate                                                               
[and the tax  rate after the allowance]; so  progressive tax rate                                                               
deduction is what the taxpayer was  able to take off its tax rate                                                               
by virtue of the $5 per barrel allowance.                                                                                       
CO-CHAIR FEIGE interjected  it is the percentage that  the $5 per                                                               
barrel is worth at each price.                                                                                                  
5:38:27 PM                                                                                                                    
REPRESENTATIVE TUCK  understood more  is subtracted as  the state                                                               
taxes at lower prices.                                                                                                          
MR. MAYER  answered this is because  that $5 per barrel  is fixed                                                               
and $5  per barrel is  a much bigger  proportion of a  $60 barrel                                                               
than it is of a $140 barrel.                                                                                                    
CO-CHAIR  FEIGE  interjected  that  this  is  to  counteract  the                                                               
royalty curve depicted on slide 8.                                                                                              
MR. MAYER  added those  two things are  offsetting each  other to                                                               
achieve overall neutrality.                                                                                                     
5:39:07 PM                                                                                                                    
REPRESENTATIVE  SEATON  understood  the gross  revenue  exclusion                                                               
would be 20 percent of everything on slide 9.                                                                                   
MR. MAYER replied slide 9 does  not include the GRE because it is                                                               
just looking  at existing  production.   In further  response, he                                                               
clarified  that  "production  allowance"  is the  $5  per  barrel                                                               
credit.   It  can be  referred  to either  way, he  said, but  he                                                               
prefers to think of it as an allowance rather than a credit.                                                                    
5:39:46 PM                                                                                                                    
MR. MAYER,  returning to his presentation,  compared the marginal                                                               
and  average rates  between  ACES and  CSSB  21(FIN) am(efd  fld)                                                               
[slide 10].  He explained the  depicted tax rates are not graphed                                                               
on  oil price,  but  rather  on production  tax  value (PTV)  per                                                               
barrel, which is what the tax  is actually based on.  Under ACES,                                                               
the average tax rate rises steeply  between a PTV of $30 [and tax                                                               
rate of  25 percent]  and $92.50  (and tax  rate of  50 percent).                                                               
After this, the rate of  incline is shallower, reaching a maximum                                                               
tax  rate of  75 percent  at  $300 per  barrel PTV.   At  current                                                               
prices of $110 and  $30 per barrel in costs, the PTV  is $80.  At                                                               
a PTV of $80,  the marginal tax rate under ACES  is just below 80                                                               
percent.   At a PTV of  $92.50, the marginal tax  rate under ACES                                                               
is 86 percent.                                                                                                                  
5:41:27 PM                                                                                                                    
MR. MAYER pointed  out what can happen at this  high marginal tax                                                               
rate when a producer is making  a decision on capital to spend or                                                               
to do something to reduce costs.   At a PTV of $92.50, anything a                                                               
producer does  to increase  its efficiency -  reduce its  costs -                                                               
the  producer gets  only 16  percent of  the benefit  because the                                                               
remaining percent of  the benefit goes to the  state.  Similarly,                                                               
for any dollar  a producer decides to spend  it bears effectively                                                               
only 16 percent of the cost  of that dollar because the remainder                                                               
on  an after-tax  cash flow  basis  goes to  the state.   In  his                                                               
opinion, this  is one of  the biggest  problems of ACES  from the                                                               
perspective  of incentivizing  cost control  and efficiency.   In                                                               
the hypothetical  example of reaching  a PTV of $300  per barrel,                                                               
the marginal tax  rate under ACES would reach 100  percent and at                                                               
even higher prices could go above  100 percent, and more than 100                                                               
percent government support  for spending, although that  is not a                                                               
major concern at the moment or in the near future.                                                                              
5:43:02 PM                                                                                                                    
CO-CHAIR FEIGE inquired  what a PTV of $92.50 equates  to for the                                                               
sales price on North Slope crude.                                                                                               
MR. MAYER  responded it would be  an oil price of  $120, assuming                                                               
$30  per barrel  in costs;  therefore it  would be  territory the                                                               
state has seen recently.                                                                                                        
5:43:31 PM                                                                                                                    
REPRESENTATIVE SEATON  remarked this  would be a  big stimulation                                                               
to increase  investment because the  state is paying most  of the                                                               
cost, but  it would be  a very high  marginal rate if  a producer                                                               
does not invest.                                                                                                                
MR. MAYER  agreed this is  one way to  look at it,  but cautioned                                                               
against looking  at it  that way  because it  is an  incentive in                                                               
general to spend money or not to  put a lot of effort into saving                                                               
money.  The  distinction between that and investing  is that when                                                               
a producer  looks to investing  in Alaska  for a large  scale new                                                               
project, the  producer is considering  what it looks like  over a                                                               
very broad range of prices and  how it performs over the next 20-                                                               
30 years.  Whereas a  producer considering whether to resurface a                                                               
runway  can base  its decision  on  this year's  cash flow,  this                                                               
year's prices,  and what the  after-tax benefit of  that decision                                                               
is  to  the  producer  this  year.   When  running  economics,  a                                                               
producer first and  foremost wants to know that the  project on a                                                               
stand-alone basis  makes sense within  the regime and  then maybe                                                               
the producer will also take into  account the after tax cash flow                                                               
benefits of looking at it on an incremental basis.                                                                              
5:45:15 PM                                                                                                                    
MR.  MAYER, in  response to  Representative Tuck,  confirmed that                                                               
the  yellow line  depicting the  ACES marginal  rate on  slide 10                                                               
does not factor in any of the credits.                                                                                          
5:45:29 PM                                                                                                                    
MR. MAYER returned to his  comparison of the marginal and average                                                               
rates on slide 10, pointing out  that the marginal tax rate under                                                               
CSSB  21(FIN) am(efd  fld) is  a  steady flat  35 percent,  never                                                               
changing  and never  deviating  from the  base  rate, unlike  the                                                               
steeply rising  rate of ACES.   When the $5 per  barrel allowance                                                               
is taken into account, there is  a downward curve of the tax rate                                                               
[at  lower PTVs].   Where  ACES sets  the average  rate and  gets                                                               
spikes  in  the  marginal  rate that  correspond  to  that,  CSSB
21(FIN) am(efd  fld) sets the marginal  rate and that rate  is 35                                                               
percent.  Under  the Senate bill, the very first  dollar of value                                                               
has the $5 credit/allowance applied to  it and from that point on                                                               
each marginal  dollar of value is  being taxed at the  35 percent                                                               
marginal  rate, bringing  up  the average  and  resulting in  the                                                               
progressive slope depicted  on the graph, rather  than the spikes                                                               
of up to 80 percent as happens under ACES.                                                                                      
5:46:38 PM                                                                                                                    
MR. MAYER  turned to  discussing the  ACES tax  regime in  a base                                                               
production portfolio [slide 11].   Drawing attention to the upper                                                               
left  graph, he  said  the regime's  profit-based production  tax                                                               
consumes a  progressively larger amount  of the pie as  the price                                                               
per  barrel increases,  rising to  75  percent and  above at  the                                                               
upper price levels.  Turning to  the upper right graph, he looked                                                               
at  the split  of net  present  value of  production between  the                                                               
state, the  federal government, and  the company.  At  around $70                                                               
West Coast ANS price - the  point at which progressivity kicks in                                                               
after costs have  been netted away - the value  of the project as                                                               
a whole to the State of  Alaska starts to rise dramatically (blue                                                               
line)  while the  value  to  the company  starts  to flatten  out                                                               
(yellow  line).   So, relatively  speaking, for  each incremental                                                               
increase in  oil price there is  less benefit to the  company and                                                               
the  vast majority  of the  increased  value is  captured by  the                                                               
state  under  the  progressivity under  ACES.    Correspondingly,                                                               
there are  only small increases, relatively  speaking, in project                                                               
value in terms of net present  value per barrel of oil equivalent                                                               
(boe) as price levels rise.                                                                                                     
5:48:23 PM                                                                                                                    
MR. MAYER, in response to  Co-Chair Saddler about the upper right                                                               
graph, pointed out that the  state's split (blue line) pulls away                                                               
from  the   company's  split  (yellow   line)  and   the  federal                                                               
government's  split (red  line).   This is  because progressivity                                                               
under ACES  takes the lion's  share of  the net present  value at                                                               
higher  price levels  as  compared to  the  company.   Responding                                                               
further, he clarified the dollar  sum is in millions, so [25,000]                                                               
represents  $25  billion  in  net   present  value  of  a  future                                                               
production stream of base production.   But, he added, it is more                                                               
useful to think about proportion than the absolute numbers.                                                                     
5:49:31 PM                                                                                                                    
MR. MAYER  then discussed,  for comparison, the  tax regime  in a                                                               
base production  portfolio under CSSB 21(FIN)  am(efd fld) [slide                                                               
12].   [Drawing attention to the  upper left graph], he  said the                                                               
Senate  bill has  an overall  flat, neutral,  roughly 65  percent                                                               
level of  government take across  a broad  range of prices.   The                                                               
mild implicit progressivity  created by the $5  per barrel credit                                                               
counteracts the regressive element of  the royalty to create that                                                               
overall neutrality.  Drawing attention  to the upper right graph,                                                               
he pointed  out the  relatively even split  of net  present value                                                               
between  state government,  federal government,  and the  company                                                               
across all  the different  price levels.   The state  still takes                                                               
the lion's share  compared to the other two, but  overall it is a                                                               
much more even  balance.  Correspondingly, there is  a higher net                                                               
present value per barrel for the base production portfolio.                                                                     
5:50:38 PM                                                                                                                    
MR.  MAYER, in  response to  Representative P.  Wilson about  the                                                               
lower left graph,  explained that ATCF stands for  after tax cash                                                               
flow.    The green  color  within  the  bars represents  all  the                                                               
revenues  received and  the  colors below  $0  represent all  the                                                               
costs  incurred -  government take  and  capital, operating,  and                                                               
drilling costs.   Essentially,  the after tax  cash flow  line is                                                               
the balance of the positive and negative.                                                                                       
5:51:17 PM                                                                                                                    
REPRESENTATIVE  SEATON surmised  the graphs  on slides  11-12 are                                                               
inflated at  2.5 percent through the  year 2037 and a  per barrel                                                               
price of $185.                                                                                                                  
MR. MAYER answered  correct.  He added that all  the analysis PFC                                                               
Energy has presented to the legislature,  in the two years he has                                                               
been presenting as well as  previously, has always used some sort                                                               
of inflation assumption, usually 2.5 percent.                                                                                   
5:51:55 PM                                                                                                                    
REPRESENTATIVE TARR  observed the  after tax  cash flow  for CSSB
21(FIN) am(efd fld) [slide 12]  does not look much different than                                                               
the ATCF for  ACES [slide 11].  She  requested further discussion                                                               
in this regard,  given that is the part that  the state is really                                                               
trying to get to if it wants companies to invest.                                                                               
MR. MAYER replied there is a  substantial jump in that ATCF line,                                                               
which he demonstrated  by scrolling from one slide  to the other.                                                               
To  quantify this  difference  he drew  attention  to the  bottom                                                               
right graph on each slide, noting  the per barrel cash margin for                                                               
a 5-year window at  a price of $120 per barrel  is $27 under ACES                                                               
versus $36 under CSSB 21(FIN) am(efd fld).                                                                                      
5:53:12 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  whether  the aforementioned  5-year                                                               
window is the years 2012-2017.                                                                                                  
MR. MAYER  responded the  5-year window  is the  years 2017-2022.                                                               
If looking just at base  production, he explained, there would be                                                               
no  reason not  to  look  at 2012-2017.    However,  since a  new                                                               
development is  also being included, the  idea is to take  a look                                                               
after  the majority  of the  capital has  been spent  because one                                                               
would  get a  big difference  between  the early  years when  the                                                               
capital is being spent and  the later years when harvesting cash.                                                               
So, the  idea is to  look at one  reference period after  the big                                                               
lump of capital has been spent  to see how much the producer gets                                                               
to keep during the cash accretion portion of the project.                                                                       
5:53:56 PM                                                                                                                    
REPRESENTATIVE SEATON  surmised, then, that the  price assumption                                                               
is $113-$120 per barrel.                                                                                                        
MR. MAYER answered that, in nominal  terms, he would have to look                                                               
it up.  There  are two ways to build a  model, he elaborated, and                                                               
both achieve the same  thing.  One way is to run  a model in real                                                               
terms where  the oil price and  the costs remain constant.    For                                                               
example, this  type of  model could  be used to  look at  a fixed                                                               
royalty regime  in the  Lower 48  that does  not have  any price-                                                               
dependent components.  As long as  a stable discount rate is used                                                               
for  comparison  those  results  are  comparable  with  anything.                                                               
However, the  ACES regime  has price-dependent  elements, meaning                                                               
inflation must be included in  the model because the threshold at                                                               
which  progressivity  and other  elements  kick  in is  going  to                                                               
change in  real terms.   Rather  than trying  to figure  out what                                                               
those thresholds  are, it is  easier to  do the standard  type of                                                               
modeling which  has everything in  the model on a  nominal basis.                                                               
An inflation  rate of 2.5 percent  is assumed and that  occurs on                                                               
the  revenue  side rather  than  on  the  question of  where  the                                                               
brackets of progressivity kick in.                                                                                              
5:55:39 PM                                                                                                                    
REPRESENTATIVE SEATON  said he  is asking  this because  "we have                                                               
these cash  margin assumptions and  yet we have in  other reports                                                               
from oil  companies, cash  margins, their  worldwide assumptions,                                                               
and all, and  if we do not  know how we are  comparing because we                                                               
are  talking about  $165  a  barrel oil  compared  to their  cash                                                               
margins at a particular time, it  makes it very difficult to make                                                               
those comparisons.   So that is why I am  trying to understand if                                                               
we have inflated these; then it  would appear that Alaskan oil is                                                               
far  more profitable  than ...  their margin  worldwide ....   In                                                               
those shorter  time periods,  shorter year  periods, it  does not                                                               
seem to be as big an effect on that."                                                                                           
5:56:35 PM                                                                                                                    
MR. MAYER resumed his presentation,  addressing the impact of the                                                               
gross  revenue exclusion  [slide 13].   He  pointed out  that the                                                               
slide  in the  committee's packets  shows  a GRE  of 30  percent,                                                               
rather than 20  percent, which he has corrected  in the on-screen                                                               
slide.   For purposes of this  exercise, he continued, it  is not                                                               
the absolute numbers that are  of concern but rather the question                                                               
of what the  GRE does.  The  answer is the GRE  simply shifts the                                                               
overall curve  so that the  point at which  "progressivity" kicks                                                               
in is  moved out.   Slide 13  repeats the calculations  of [slide                                                               
9], he  explained, but  adds in  a GRE.   At a  price of  $60 per                                                               
barrel and  no GRE, the  effective tax rate after  application of                                                               
the $5 per barrel allowance is  10 percent; when a 20 percent GRE                                                               
is factored in, the effective tax rate  is lowered to no tax.  At                                                               
a price of $80 per barrel the  effective tax rate with the GRE is                                                               
4.1 percent  [22.5 percent with no  GRE], at $120 per  barrel the                                                               
effective tax  rate with  the GRE is  14.3 percent  [28.8 percent                                                               
with no GRE], and at $140  per barrel the effective tax rate with                                                               
the GRE is 16.4 percent [30 percent  with no GRE].  Thus, in each                                                               
case, applying the GRE results  in a substantial reduction in the                                                               
tax rate and,  essentially, a shifting of the point  at which the                                                               
production tax starts to kick in.                                                                                               
5:58:12 PM                                                                                                                    
MR. MAYER then looked at a  scenario of new development at a cost                                                               
of $18 per  barrel on a stand-alone basis under  ACES [slide 14].                                                               
Drawing attention  to the lower  left graph, he pointed  out that                                                               
negative cash flows go along with  a new development in its early                                                               
years.   This negative  cash flow is  the result  of expenditures                                                               
for  facilities (yellow  color in  the bars)  and drilling  (blue                                                               
color).  Once production starts,  operating costs (red color) and                                                               
government  take (purple  color) begin  to occur.   In  the early                                                               
stages of  development, the positive  impact of the  ACES credits                                                               
can be  seen (purple  bars projecting  upward), which  reduce the                                                               
initial cost  to the  developer.  The  green bars  depict revenue                                                               
from  the project.   Continuing,  he  said the  upper left  chart                                                               
shows the overall  high level of government take  that comes from                                                               
the substantial progressivity  in ACES, which rises  to nearly 80                                                               
percent as prices [reach $160  per barrel].  Drawing attention to                                                               
the  upper right  graph, he  noted the  substantial diversion  in                                                               
value of the project to the state versus value to the company.                                                                  
5:59:49 PM                                                                                                                    
The committee took an at-ease from 5:59 p.m. to 6:08 p.m.                                                                       
6:08:44 PM                                                                                                                    
MR. MAYER next  looked at this same scenario  of new development,                                                               
but under  CSSB 21(FIN) am(efd  fld) [slide 15, top  left graph].                                                               
Government take  is much  lower, he  said, going  down to  a flat                                                               
level  of just  below 61  percent over  a broad  range of  prices                                                               
because of  the GRE.   The GRE reduces  the overall level  of the                                                               
tax  and pushes  out  the  price point  at  which production  tax                                                               
starts  to occur  to $65.   When  combined with  a net  operating                                                               
loss, this  can mean  that at  low prices  the production  tax is                                                               
negative.   Drawing attention to the  bar for $50 per  barrel, he                                                               
noted that the production tax  is located above federal and state                                                               
income tax rather than beneath them  as is the case for the other                                                               
prices.  "The top of that bar is  the top of where the royalty by                                                               
itself comes  to and the  blue is,  in this case,  the production                                                               
tax  taking  down the  total  level  of  government take  to  70-                                                               
something percent  rather than the 90-something  percent that you                                                               
would  have had  from the  royalty  alone.   That is  effectively                                                               
negative  contribution  from the  production  tax  at the  lowest                                                               
price level."                                                                                                                   
6:10:17 PM                                                                                                                    
MR. MAYER,  in response  to Co-Chair Feige,  clarified that  at a                                                               
West Coast ANS price of $50 per  barrel, the top of the bar is at                                                               
90  percent because  if it  were  just royalty  with federal  and                                                               
state income  tax, the  government take  would reach  90 percent.                                                               
However,  in this  price  case  of $50  per  barrel,  the way  to                                                               
interpret  the production  tax  (light blue  color)  is that  the                                                               
production tax is negative, thereby  lowering the government take                                                               
from 90 percent to about 73 percent.                                                                                            
6:11:26 PM                                                                                                                    
MR.  MAYER   continued,  reiterating  that  at   low  prices  the                                                               
combination of  the GRE  with the net  operating loss  credit can                                                               
result  in a  negative  tax exposure  to the  state.   He  noted,                                                               
however,  that in  general it  is a  much smaller  liability than                                                               
what the  state has under the  existing system of ACES  where all                                                               
production accrues to capital credit.   Under CSSB 21(FIN) am(efd                                                               
fld)  this  only  occurs  in circumstances  where  there  is  new                                                               
development with  the gross  revenue exclusion,  which will  be a                                                               
very small portion of production in the coming years.                                                                           
6:12:11 PM                                                                                                                    
MR. MAYER  moved to  the cash  flow chart at  the bottom  left of                                                               
slide  15,  pointing  out  there   would  still  be  a  "negative                                                               
contribution of government take in  the early years" which, under                                                               
CSSB 21(FIN) am(efd  fld), come in the form of  the net operating                                                               
loss credits.   These credits  are smaller than  the contribution                                                               
that  comes under  ACES.    Under the  Senate  bill, the  state's                                                               
support  for spending  is 35  percent through  the net  operating                                                               
loss credit  rather than  the 45  percent level  of support  on a                                                               
stand-alone  basis under  ACES; for  an incumbent  producer under                                                               
ACES the support is much higher than 45 percent.                                                                                
6:13:04 PM                                                                                                                    
REPRESENTATIVE SEATON  calculated the differential under  the GRE                                                               
is about  17 percent.   Regarding Mr. Mayer's statement  that not                                                               
much of  the oil  now or in  the near future  would be  under the                                                               
GRE, he pointed  out that if the state is  trying to do something                                                               
for a  long term then almost  all of the oil  eventually is going                                                               
to be  under this  GRE.   He asked,  therefore, whether  it makes                                                               
sense to  have a provision that  could be a huge  negative at low                                                               
prices and when the value of the royalty would also be low.                                                                     
MR. MAYER replied his view is that  it is a trade-off of a number                                                               
of things.   It is  a smaller  negative liability than  the state                                                               
currently has  under the capital credits  of ACES.  Both  the GRE                                                               
and the ability  to monetize the net operating loss  come back to                                                               
a question  of balance in the  system and wanting to  achieve the                                                               
same economics for a small producer  as for an incumbent.  In his                                                               
opinion, that  cannot be  done without  having an  operating loss                                                               
allowance.  He said he thinks  this trade-off is an effective one                                                               
because the  capital credits are  gone while not  eliminating the                                                               
liability  entirely because  one  also wants  to maintain  strong                                                               
economics for new producers and  give them the same opportunities                                                               
that an incumbent producer has.                                                                                                 
6:14:51 PM                                                                                                                    
REPRESENTATIVE SEATON, directing attention  to slide 14, observed                                                               
that [the top left graph]  shows the [government take] under ACES                                                               
as being down to only 75 percent  [at a price of $50 per barrel].                                                               
So, he concluded, the ACES  reduction on capital credits are less                                                               
of  a liability  for the  state  than the  liability under  [CSSB
21(FIN) am(efd fld)].   He inquired whether  the reduction [under                                                               
the Senate bill] is mostly the GRE.                                                                                             
MR. MAYER  answered it  is the  impact of the  20 percent  GRE in                                                               
conjunction with the net operating loss credit.                                                                                 
REPRESENTATIVE  SEATON  requested  that  as  the  analysis  moves                                                               
forward the committee  look at a way to  limit downside liability                                                               
from  the GRE  at low  prices, such  as a  limitation at  certain                                                               
prices on gross  revenue exclusion.  If the state  builds a long-                                                               
term system  that over time has  more and more percentage  of oil                                                               
qualifying for  the gross revenue  exclusion, he opined,  it will                                                               
have  even more  liability and  will have  to take  money out  of                                                               
royalties to pay for that GRE.                                                                                                  
CO-CHAIR FEIGE replied "fair enough."                                                                                           
6:16:38 PM                                                                                                                    
REPRESENTATIVE  TUCK drew  attention to  the effects  of the  GRE                                                               
shown on slide 13 and surmised  the GRE is regressive rather than                                                               
a reverse progressivity  because as prices go up the  more tax is                                                               
MR. MAYER,  shaking his head no,  said it is almost  entirely the                                                               
$5 per barrel allowance that does  this.  The reduction in tax is                                                               
still by  far the  greatest at the  lowest prices,  he continued.                                                               
The GRE slightly  overall reduces the level of tax  and it pushes                                                               
the curve out a bit farther so that  at a price of $60 per barrel                                                               
there is no tax liability.                                                                                                      
REPRESENTATIVE TUCK  understood, then,  it is  the $5  per barrel                                                               
allowance that gives more back at lower prices.                                                                                 
MR. MAYER responded "exactly."                                                                                                  
REPRESENTATIVE TUCK further understood  the GRE does the opposite                                                               
as prices go up - it gives more back as the price goes up.                                                                      
MR.  MAYER confirmed  that is  the case  compared to  the $5  per                                                               
barrel exclusion, but in absolute terms  he said he would need to                                                               
check the numbers.                                                                                                              
6:18:54 PM                                                                                                                    
MR. MAYER resumed his presentation,  turning to discussion of the                                                               
net  operating loss  credit  and sunset  of  the exploration  and                                                               
small  producer  credit  [slide 16].    Recounting  its  progress                                                               
through the Senate,  he said the original bill had  a sunset date                                                               
of 2022 for the exploration  and small producer credit.  Removing                                                               
the  ability  of small  producers  to  stack credits,  which  can                                                               
result  in   75  percent  effective   support  of   spending  for                                                               
exploration, limits  the overall level of  government support for                                                               
exploration spending  to a sensible  amount and  makes government                                                               
support  equal  between  a  new  company  with  no  existing  tax                                                               
liability and  an incumbent.   Whatever that level  of government                                                               
support is,  it is his  opinion that the  state would want  to be                                                               
equal between  a new company  with no existing tax  liability and                                                               
an incumbent.                                                                                                                   
6:21:03 PM                                                                                                                    
MR. MAYER said  a nice thing about  how this all works  out - the                                                               
higher rate  with the higher  corresponding net operating  loss -                                                               
is that even  though the capital credits have been  taken out and                                                               
the  exploration credit  is  sunset, people  will  still have  35                                                               
percent government  support for exploration spending  because the                                                               
net operating loss credit can  be monetized.  A complicated lever                                                               
is being  taken out  of legislation  to get  to a  simpler system                                                               
that is completely even in its  impacts.  Whether for an existing                                                               
producer or someone with no tax  liability, the impact is an even                                                               
35  percent in  government support  for exploration  spending and                                                               
the bill is much simpler.   By doing this, that flat low marginal                                                               
rate is maintained to create  a strong incentive for efficiencies                                                               
and for  cost control.   Exposure to  the state from  higher cost                                                               
projects at lower prices is  limited, relatively speaking, by not                                                               
having the capital  credits.  Additionally, the  overall level of                                                               
government support for exploration spending is evened out.                                                                      
MR.  MAYER added  there may  be specific  instances in  which the                                                               
administration wants to go beyond  35 percent government support.                                                               
For instance, when  there are particular known  prospects that it                                                               
is  strongly  in   the  state's  interest  to   see  drilled  for                                                               
information purposes  as much as  anything else.   Mechanisms for                                                               
accomplishing this  can be talked about  at a later point  by the                                                               
administration.   He offered his opinion  that it makes a  lot of                                                               
sense to have the same level  of support for new companies as for                                                               
incumbent  ones and  to  have  it capped  at  35 percent  overall                                                               
support  for exploration  rather than  the current  70-90 percent                                                               
effective government support under ACES.                                                                                        
6:23:05 PM                                                                                                                    
MR. MAYER,  in response to Representative  Seaton, confirmed that                                                               
the  bill currently  before the  committee,  CSSB 21(FIN)  am(efd                                                               
fld), does  not have any credits  that can be stacked  because it                                                               
has only the  35 percent net operating loss credit.   The current                                                               
bill still  has the  exploration credit,  he continued,  but that                                                               
sunsets in 2016.  So, once  that exploration credit is gone there                                                               
will only be the 35 percent net operating loss credit.                                                                          
REPRESENTATIVE SEATON  understood that  between now and  2016 the                                                               
exploration  credit  will  be available  to  both  producers  and                                                               
MR. MAYER  answered correct.   Given people may  have commitments                                                               
and other  things already made on  that basis, and given  that it                                                               
is a short timeframe, it seems  easier to let them expire as they                                                               
are already  slated to do rather  than to take them  away for the                                                               
benefit of a year.                                                                                                              
CO-CHAIR FEIGE,  responding to Representative Seaton,  noted that                                                               
the "Middle Earth" credits under "025  (n), (m), and (o)" are not                                                               
stackable, a company must take one or the other.                                                                                
6:25:01 PM                                                                                                                    
MR.  MAYER concluded  his  presentation  [slides 16-18],  stating                                                               
that CSSB 21(FIN) am(efd fld):   provides overall neutrality at a                                                               
competitive  level of  government take;  improves competitiveness                                                               
for  new  projects  via  the  GRE;  reduces,  although  does  not                                                               
eliminate, the downside risk to  the state from credits; provides                                                               
an overall balanced system with  even impacts for both incumbents                                                               
and  new producers;  incentivizes producer  efficiency through  a                                                               
neutral   regime   with   low  and   constant   marginal   rates;                                                               
substantially  simplifies the  fiscal  system;  and moves  Alaska                                                               
into the realm of serious  competitiveness with other regimes for                                                               
international capital.                                                                                                          
6:26:02 PM                                                                                                                    
REPRESENTATIVE TARR  requested Mr. Mayer to  provide the internal                                                               
rate of return [for the bottom right graphs] on slides 11-12.                                                                   
MR. MAYER  answered no, explaining  internal rate of return  is a                                                               
concept that  relies on initial capital  spending with subsequent                                                               
cash flow  that comes from that.   Slides 11-12 look  at the base                                                               
production  portfolio  where there  is  no  initial spending  and                                                               
subsequent cash and  therefore an internal rate  of return cannot                                                               
be gotten because it is undefined.                                                                                              
6:26:44 PM                                                                                                                    
REPRESENTATIVE SEATON  drew attention  to slide  3 and  the gross                                                               
revenue  exclusion  (GRE)   of  20  percent  for   oil  from  new                                                               
participating  areas (PAs),  PA expansions,  and areas  in legacy                                                               
fields not  previously contributing to production.   He recounted                                                               
that at  the February 28,  [2013], meeting of  ConocoPhillips and                                                               
during a  trip to the North  Slope, it was discussed  that Alaska                                                               
is a  place where it  is very hard  to develop and  produce every                                                               
last barrel,  but ways  have now  been developed  to economically                                                               
produce pockets of  oil that were once uneconomic.   He therefore                                                               
inquired why  the state should  give gross revenue  exclusions to                                                               
things that  are more  economic than  conventional drilling.   He                                                               
further asked why, from a  legislative aspect, members should not                                                               
listen to the producers' testimony.                                                                                             
6:28:59 PM                                                                                                                    
MR. MAYER, displaying  slide 18, replied there is  some degree of                                                               
trade-off between  how far one  is comfortable going  in reducing                                                               
government take  overall and where  one wants  to be in  terms of                                                               
incentivizing new production.   He said CSSB  21(FIN) am(efd fld)                                                               
takes Alaska to  the upper end of that  realm of competitiveness,                                                               
but is far  from radical or aggressive  in how far it  goes.  The                                                               
gross revenue exclusion  is a way of saying  the state recognizes                                                               
that  to  be  truly  competitive  across a  broad  range  of  new                                                               
developments it  would like to be  a little bit lower  than this.                                                               
What  the gross  revenue exclusion  should apply  to is  then the                                                               
next  question.   New units  and new  producing areas  are fairly                                                               
straightforward  and,  in  his  opinion,  so  are  expansions  of                                                               
existing  areas.   Thus, the  remaining area  in question  is the                                                               
legacy  fields, given  it is  known that  the greatest  resources                                                               
could be  produced from  these fields,  particularly in  the next                                                               
five to  six years.  Is  there a way of  incentivizing the legacy                                                               
fields and what  is the trade-off of reducing  government take on                                                               
things that  in some cases  many not need  a lower rate  but also                                                               
wanting to  ensure the  state has a  competitive rate  for things                                                               
that  do?    The  tax   code  is  not  necessarily  the  sharpest                                                               
instrument for  doing that,  and probably is  the bluntest.   The                                                               
Department of Natural Resources has  the expertise to make a call                                                               
as to  whether a portion  of a reservoir  is or is  not currently                                                               
contributing to production  and on the basis  of the department's                                                               
determination something could then  qualify for the gross revenue                                                               
exclusion.  If  the largest volume of potential  new resources is                                                               
in  the legacy  fields and  one really  wants to  get to  a truly                                                               
competitive rate to encourage as  much activity as possible, then                                                               
it makes sense  to apply some form of gross  revenue exclusion to                                                               
those.  It  is a trade-off between a number  of things, including                                                               
how far one is willing to go on the base rate.                                                                                  
6:32:21 PM                                                                                                                    
REPRESENTATIVE SEATON stated he has  a problem with throwing this                                                               
into an  administrative procedure to determine  whether something                                                               
is or  is not new.   He predicted a gross  revenue exclusion will                                                               
be  requested for  every single  thing that  requires a  drill or                                                               
enhanced   production  such   as   coil   tubing  and   laterals,                                                               
consequently resulting  in a multitude  of court challenges.   He                                                               
said he  would like further  analysis as  to how difficult  it is                                                               
going to be  to throw this into the realm  of administration.  He                                                               
offered his belief  the Senate overreached when  it provided that                                                               
new oil  does not  have to  be a new  reservoir or  new producing                                                               
area or a new unit.                                                                                                             
CO-CHAIR  FEIGE said  there  are two  issues as  far  as what  is                                                               
considered new  oil - oil  that may not necessarily  get produced                                                               
given the ACES tax regime, or  new oil that can be produced given                                                               
the economics of CSSB 21(FIN) am(efd  fld).  There are two coiled                                                               
tubing rigs on the North Slope, and  one of them is stacked.  So,                                                               
they can only  drill holes so fast.  He  offered his opinion that                                                               
if the state  improves the economics it will lead  to more coiled                                                               
tubing rigs drilling more holes and  more holes will lead to more                                                               
oil in the Trans-Alaska Pipeline System.                                                                                        
6:35:18 PM                                                                                                                    
REPRESENTATIVE  SEATON, in  regard  to  improving the  economics,                                                               
argued  that  "we're  not  talking  about  having  to  build  new                                                               
production facilities, we're  not having to do  new piping, we're                                                               
not  having to  do transit  pipes ...  and when  we give  a gross                                                               
revenue exclusion  to those that  don't require  much investment,                                                               
at  least according  to the  testimony ...  of ConocoPhillips  at                                                               
their analyst meeting  ... we have to presume they  are not lying                                                               
to their  investors.   It seems like  extending that  to existing                                                               
...  participating  areas  that  are already  drilled,  that  are                                                               
already  producing,  and that  they're  simply  fault blocks  and                                                               
those  kind of  things which  this more  economical method  is to                                                               
access, further lowering that government take is questionable."                                                                 
CO-CHAIR FEIGE said the committee can  have the Division of Oil &                                                               
Gas testify as  to how well it can determine  whether that is the                                                               
case.  The question is how to  define new oil and whether new oil                                                               
will be taxed differently than legacy  oil.  He said CSSB 21(FIN)                                                               
am(efd  fld) makes  a significant  improvement in  getting Alaska                                                               
into the zone  of being more competitive.  The  question for this                                                               
committee is  whether that is  competitive enough to lead  to the                                                               
development that is needed to level off or increase production.                                                                 
6:37:29 PM                                                                                                                    
REPRESENTATIVE SEATON,  in response  to Co-Chair  Saddler, agreed                                                               
to share the information that generated his questions of today.                                                                 
6:37:45 PM                                                                                                                    
REPRESENTATIVE TARR returned to  her question about internal rate                                                               
of return on slides 11-12 and asked for further elaboration.                                                                    
MR. MAYER replied in those  slides that are base production there                                                               
is capital being spent but it is  being spent at the same time as                                                               
there is production, so there is  never a period of negative cash                                                               
6:38:13 PM                                                                                                                    
REPRESENTATIVE  TARR,   referring  to   slide  18,   offered  her                                                               
understanding that  Alaska's lease  expenditures are quite  a bit                                                               
lower than  in the Lower  48.   She surmised, however,  that that                                                               
would not be reflected as a  part of government take in the Lower                                                               
48  because of  the private  landholder situation  there.   Since                                                               
slide 18 only  looks at government take, she  asked whether there                                                               
is a  way to evaluate some  of those other expenditures  in terms                                                               
of overall competitiveness.                                                                                                     
MR. MAYER  responded Econ One did  well in terms of  looking at a                                                               
range  of economic  metrics.   It  ultimately comes  back to  net                                                               
present value and how other  things compare between these regimes                                                               
and others.   He agreed to provide  other comparisons, concurring                                                               
that it  is not  just about  government take,  but also  cost and                                                               
other things.  By and large, he  said, costs in Alaska tend to be                                                               
higher rather  than lower  and they hurt  rather than  hinder the                                                               
competitiveness question.                                                                                                       
6:39:38 PM                                                                                                                    
REPRESENTATIVE SEATON,  regarding the  Gerking study  of drilling                                                               
sensitivity to tax  rates, inquired whether Mr.  Mayer shares the                                                               
perspective  that  lowering the  tax  rates  would lead  to  dis-                                                               
investment in new oil.                                                                                                          
MR. MAYER  answered, yes, he  absolutely believes  that drilling,                                                               
investment,  and all  those other  things are  responsive to  tax                                                               
rates.  He said he also  agrees with Mr. Pulliam's reading of the                                                               
Gerking paper and  the conclusions that Mr. Pulliam  drew on that                                                               
basis.   As  to what  he  knows about  the paper  itself and  the                                                               
soundness of  its methodology, he said  he only knows as  much as                                                               
Mr. Pulliam, which,  as was said, is limited to  what can be told                                                               
from the  paper itself because of  not having the sources  of the                                                               
data.  The paper is one  reasonableness test of how reasonable is                                                               
it to believe  the state could, over an extended  period of time,                                                               
make back  the revenue that  is foregone by  doing this.   As was                                                               
said  by   Mr.  Pulliam,   there  are  a   number  of   tests  of                                                               
reasonableness, but  they are only  tests and  none of them  is a                                                               
guarantee.    Taken  together,   however,  they  indicate  it  is                                                               
reasonable to expect that it is possible even if not guaranteed.                                                                
6:41:21 PM                                                                                                                    
REPRESENTATIVE  SEATON read  from the  conclusion of  the Gerking                                                               
study, page  15, which  states:  "Results  of this  study suggest                                                               
that oil production  is highly inelastic with  respect to changes                                                               
in  production taxes.  ... Policy  implications  of this  outcome                                                               
suggest that state officials may  consider raising production tax                                                               
rates as  a way to increase  revenue while risking little  in the                                                               
way of loss  to future oil activity."   Therefore, Representative                                                               
Seaton said,  it seems  the conclusion in  this paper  is exactly                                                               
the opposite of what is being proposed.                                                                                         
MR. MAYER  replied he  and Mr.  Pulliam both  came away  from the                                                               
paper  with  the  same  conclusion, which  is  that  the  study's                                                               
authors drew their  conclusion based on very,  very small changes                                                               
in  government take.    In  looking at  the  study  data and  the                                                               
sensitivity implied to drilling  rather than just production, one                                                               
would expect that for the  scale in government take [being talked                                                               
about for  Alaska], there would  actually be quite  a significant                                                               
change in overall amount of drilling and investment.                                                                            
6:43:27 PM                                                                                                                    
CO-CHAIR FEIGE drew attention to  slide 18 and requested both Mr.                                                               
Pulliam  and Mr.  Mayer to  each state  their opinion  on whether                                                               
CSSB  21(FIN)  am(efd fld)  would  make  Alaska competitive  with                                                               
other regimes against which it competes.                                                                                        
MR. PULLIAM responded he thinks  CSSB 21(FIN) am(efd fld) strikes                                                               
a  good  balance and  would  give  Alaska a  competitive  system,                                                               
particularly  with the  GRE in  place for  new production.   When                                                               
thinking about the  investment metrics outlined on  slide 11, and                                                               
opportunities  in  Alaska  versus  opportunities  elsewhere,  the                                                               
Senate bill  would put  Alaska projects in  a good  and favorable                                                               
spot.  While the bill is not  the best economics in the world, it                                                               
is solidly in the competitive range.                                                                                            
MR. MAYER  agreed with Mr.  Pulliam.  Particularly with  the GRE,                                                               
he said,  CSSB 21(FIN) am(efd fld)  would get Alaska to  where it                                                               
needs to be  in competitiveness for new production.   Without the                                                               
GRE, the  Senate bill would be  in the competitive range,  but at                                                               
the upper  end of that range.   There is a  trade-off between how                                                               
far the state  can go in forgone  revenue to get to  the heart of                                                               
the competitive  level for  existing production  and this  can be                                                               
achieved  through the  GRE.   There is  also a  trade-off between                                                               
wanting to  be as  competitive as possible  while also  needing a                                                               
regime  that is  fiscally stable  and secure  over the  next many                                                               
years.  In  making these decisions, one needs  to absolutely look                                                               
at breakeven analyses while also  remembering that it may take 10                                                               
years, if all goes well, before  the state is back at the revenue                                                               
levels  it  would   have  been  under  ACES   with  no  increased                                                               
production.   There  is  a good  several  years before  increased                                                               
production starts to take off some  of the fiscal weight, and the                                                               
further one  goes on the  base production,  the more that  is the                                                               
case.   So, given these  things, he said  it is his  opinion that                                                               
CSSB 21(FIN) am(efd fld) is not a bad balance.                                                                                  
6:47:00 PM                                                                                                                    
MR.  PULLIAM, in  further  response to  Co-Chair  Feige, said  he                                                               
thinks that he and Mr. Mayer  are in basic agreement on the bill,                                                               
particularly  when looking  at the  economics of  new development                                                               
where  the  GRE comes  into  place.   He  and  Mr.  Mayer are  in                                                               
agreement that  CSSB 21(FIN)  am(efd fld) puts  Alaska in  a good                                                               
competitive position.  The state would  not be at the high end of                                                               
competiveness, but would be right in the middle.                                                                                
6:47:38 PM                                                                                                                    
CO-CHAIR  SADDLER inquired  what Mr.  Pulliam and  Mr. Mayer,  as                                                               
professionals  in the  petroleum  economics  field, see  Alaska's                                                               
future  being if  the ACES  tax structure  is maintained  for the                                                               
next 5 to 10 years.                                                                                                             
MR.  PULLIAM answered  he  thinks the  state  will see  continued                                                               
declining production  at rates  higher than  desired.   And, like                                                               
this  year, he  thinks there  will be  more situations  of budget                                                               
deficits.  If that is the  policy the state wants to pursue, then                                                               
legislators need  to figure out  how to  save more than  what the                                                               
state has been doing, he advised.                                                                                               
MR.  MAYER replied  the ability  of ACES  to continue  generating                                                               
substantial  revenues from  declining  production  over the  next                                                               
several years  is dependent  on high  prices.   The part  of this                                                               
debate that  puzzles him most, he  said, "is when people  look at                                                               
some  of these  charts and  say 'oh  but look  at the  revenue we                                                               
would be  forgoing at $200 a  barrel.' ... At $200  a barrel, the                                                               
State of Alaska  has relatively little to worry about  ... in any                                                               
of these  regimes."   If he  was planning  for the  future fiscal                                                               
health of  the state he  would be  much more concerned  with what                                                               
any  of these  regimes look  like between  $70 and  $90 a  barrel                                                               
rather than $200.   Not only does the bill get  Alaska to a range                                                               
that is  substantially more  competitive, it does  a good  job of                                                               
protecting the state in lower price environments.                                                                               
6:49:22 PM                                                                                                                    
REPRESENTATIVE TUCK surmised that both  Mr. Pulliam and Mr. Mayer                                                               
believe CSSB  21(FIN) am(efd  fld) better  guarantees investments                                                               
in the state of Alaska in the future.                                                                                           
MR. MAYER nodded yes.                                                                                                           
MR.  PULLIAM  responded  it certainly  creates  a  much  stronger                                                               
probability of  getting the  kind of  investment the  state wants                                                               
than letting the current system stay in place.                                                                                  
6:49:54 PM                                                                                                                    
REPRESENTATIVE SEATON asked  whether the legislature's consultant                                                               
will be available  to members of the committee.   He noted he has                                                               
twice  requested  to  meet  [with  Mr.  Mayer]  and  it  has  not                                                               
happened.   He pointed  out that, in  the past,  consultants have                                                               
had a room  and members could make appointments to  see them.  He                                                               
requested  this  be  done  to  avoid having  to  hash  out  every                                                               
CO-CHAIR FEIGE agreed the request is  valid and said he will look                                                               
into working something out since Mr.  Mayer will be in Juneau all                                                               
week.  He held over CSSB 21(FIN) am(efd fld).                                                                                   

Document Name Date/Time Subjects
HRES SB21 EconOne Presentation 3.25.13.pdf HRES 3/25/2013 1:00:00 PM
SB 21
HRES SB21 PFC Energy 3.25.13.pdf HRES 3/25/2013 1:00:00 PM
SB 21
HRES SB21 EconOne Background Information.pdf HRES 3/25/2013 1:00:00 PM
SB 21